When it was announced by the Federal Government that they would be stopping true zero down mortgages http://www.fin.gc.ca/news08/data/08-051_1e.html , I was amazed that the press did not dig a little deeper into the consequences of such a quick and what in my opinion is a not very well thought through decision.
Zero down mortgages are not something new, they've been around in various forms for years. The huge difference with the ones introduced in the last year is that the client is able to get a fully discounted interest rate. SO in other words whether you have zero down or $100k down, you'll get the same rate. Of course, your mortgage will be insured by CMHC or Genworth insurance, but in the long run the cost of insurance vs. have to save $10k - $20k for most peopel is well worth it.
So as of Oct. 13th zero down mortgages are "gone". Well, the other side of the story is that they are not. Unfortunately now though it will cost the Canadian consumer much more of their hard earned money to own a home with zero down (obviously someone in Ottawa missed this point). Let me explain...
1) The Government of Canada wants you to have at least 5% down in order to buy a home now. But, if you don't have it, they are completely OK with you borrowing the 5% down payment. So you now have a mortgage payment plus a loan or line of credit payment for your down payment loan (at a higher rate than your mortgage).
2) If you can't borrow it on a side loan, don't worry there are lenders that will give you a "free down payment" or "cash back mortgage" Guess who wins here? The lenders! They can now charge you over 1.5% more for a cash back or free down than the regular zero downs or if you had 5% down. So the Fed is fine with you paying $300 more per month for housing just so they can't be on the hook for the additional 5% of your mortgage if you go into default!
3) Now instead of leaving your down payment in your RSP's to continue to accrue compound interest, consumers will be back to withdrawing their retirement funds to own a home. Most will try to re-pay it back over 15 years but some will not and just pay CCRA more taxes each year.
4) Or we are back to finance companies such as Wells Fargo which will do a zero down (at a low rate of 9%!) and 40 year amortizations - yikes!
Default rates on mortgages have been at an all-time low. There was no need for the Government to step in to take true zero downs away. What better way to slow down the economy than to slow down new home buyers from entering the market. You still have until mid-October to get a zero down - after that we only have the above options if you don't have the 5%. Conventional Government Wisdom at work! - But that's only my 2 cents!
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