Robert McLister·Opinion·September 14, 2009Updated Term Review Here’s the very latest mortgage term review, updated to reflect notable rate developments of the past two months.
Here’s the very latest mortgage term review, updated to reflect notable rate developments of the past two months.
Here’s the very latest mortgage term review, updated to reflect notable rate developments of the past two months.
Do lenders really pillage clients with the nothing down product?
The equivalent 5 year rate is 4.23% That is not bad.
Hi Shayne,
Thanks for the note. May I ask what you meant by “equivalent 5 year rate,” and how did you arrive at a rate of 4.23%?
Cheers,
Rob
A hypothetical $100K home purchased with a cash back down payment product gives you a mortgage of $95K at 5.45% Home is basically purchased at 100% LTV with a higher interest rate.
The equivalent to this is 4.23% for a $100K mortgage. Both are based on a 35 year amortization.
This doesn”t take into account the slightly higher insurance fees or any claw back if the mortgage isn’t held to term, but still not a bad deal.
BTW, love your site!!
Hi Rob,
Could be more clear sorry.
A $95K mortgage at 5.45% amortized over 35 years gives you a payment of $503.28 and a balance at the end of the five year term of $89,736.
A $100K mortgage at an interest rate of 4.22727973% with an amortization of 28.2968891
years gives you the same monthly payments and same balance at the end of the five year term.
Used properly in the right circumstances the no down payment programs are beneficial in my opinion.
Why you refer NBC’s All-In-One as a prime+0.85%? They are prime + 1, unless there is some kind of VIP deals exist.
Which banks are offering these cash back products?
Hi Shayne:
I know what you’re saying. Still, if we pretend 100% financing did exist at 4.23% (and it doesn’t, of course), putting down 5% would:
-> Still get you a materially lower rate (~0.40%)
-> Save on CMHC fees and interest on those fees
-> Avoid any down payment clawback for early termination (the average Canadian refi’s every 3.5 years).
Having zero equity is also a bigger gamble. If your home value drops and you need to refi or move, you’ll be much deeper under water.
Mike:
Yes, as with many lenders, you’ll get different rates from different places.
Adrian:
Scotia, CIBC, Laurentian, etc…
Cheers,
Rob
Hi Rob
I would agree that having a down payment is advantageous, but is ideal can be ideal in the right situation.
The difference in CHMC fees is very minimal.
You have the same equity whether the 5% comes out of your pocket or as a cash back incentive.
To Shayne
I have always considered cash-back mortgages to be overpriced as well.
Can you give some examples of what you consider the “right situation” for using them?
K.
Couple with good stable income, the required credit and good ratios.
Each one of the couple is currently renting and they want to buy a home and move in together.
Have not been able to save for a down payment, but their costs in a home will be cheaper than their current combined rent.
I am not saying that this situation is ideal, but my point was that if you look at the equivalent rates factoring in the cash back the rates are not out of the ball park.
A year ago people were taking 35 year no down payment mortgages at 5.2% In comparison if one was to take advantage of a cash back program at 5.45% today they would be renewing at the end of their term with a balance that was over $15,000 less than someone who purchased a year ago with the official no down payment program.
If a person wants a home and fully understands the costs of going with one of these programs I don’t see an issue with it.
It’s a red herring because you can’t get 0-down mortgages now. Your choices are cashback or 5% down. Cashback are 5.49% and 5% down are under 4%. I’d say that’s a bit difference!
You can’t compare the rates at face value because you are being given your 5% down. It is a bit of a difference, but only by 30 bps or so right now.