Real Estate NewsIs Zero Down Payment Right For You?
Canadians who have been madly saving for the minimum five percent down payment required to buy a new home and qualify for mortgage loan insurance can now forget about it. Down payments have just gone to zero.
Our federal housing agency, Canada Mortgage and Housing Corporation (CMHC), has expanded eligible down payment sources to enable many Canadians to realize their home ownership dream sooner than what would otherwise be possible.
As of March 1, 2004, the down payment may come from any source including lender incentives and borrowed funds. Previously, would-be homeowners were required to provide the down payment from their own or immediate family resources. However, borrowers will still have to prove their ability to meet their debt commitments in order to qualify for mortgage insurance.
CMHC experts predict that Mortgage lenders will be offering Canadians a variety of mortgage product offerings under this new program, including mortgages with terms as low as six months and fixed, adjustable and capped interest rate loans.
CMHC has long acknowledged that for most people, the hardest part of buying a home, especially the first one, is saving the necessary down payment. The original minimum down payment of 25 percent of the purchase price meant that home ownership was not possible for a large segment of the population. As a result CMHC introduced Mortgage Loan Insurance to lenders. Through this program, CMHC enabled Canadians to finance up to 95 percent of the purchase price of a home. This meant, for example, that someone wanting to buy a home for $125,000 would need just $6,250 or 5 percent of the purchase price as a down payment. At 25 percent of the purchase price they would have needed $31,250.
Mortgage Loan Insurance, which is purchased through the lender at the time the mortgage is arranged, protects the lender against payment default. This insurance should not be confused with Mortgage Life Insurance which is personal insurance designed to pay off the mortgage should the borrower die with debt outstanding. Along this line, there is also available mortgage insurance which will make mortgage payments in cases of job loss or health problems that keep you from earning.
Mortgage eligibility will still include conditions like the following:
The home which is to be occupied as your principal residence is located in Canada.
You can demonstrate that you have a down payment, that is, the difference between cash and mortgage principal.
Your home-related expenses do not exceed 32 percent of your gross household income based on Gross Debt Service (GDS) calculations.
Your total monthly debt load does not exceed 40 percent of your gross monthly household income according to Total Debt Service (TDS) calculations.
While saving a down payment may no longer be essential to home buying, it may or may not make home ownership more affordable in the long run. Although appealing at first glance, examine your situation from all angles before making commitments on paper.