95%-FinancingThis week’s Globe column takes a look at 5% downpayments.

With some basic assumptions (but no predictions), we paint a hypothetical picture of the risks facing certain first-time buyers.

The assumptions themselves aren’t really critical to the conclusion. The takeaway remains the same: 95% LTV mortgages have their place but they put some a little too close to the edge…

The story: Buying with 5% down…

  1. Rob — in your experience, what fraction of first-time home buyers are putting down 5% these days?

  2. Hi Diane,
    In practice, one’s mortgage term should match their individual needs. This story’s hypothetical scenario was based on a 10yr term, primarily to remove renewal risk from the equation.
    That said, renewal risk does become a greater concern if you have negative equity. In that case, some folks could find it impossible to switch lenders at maturity. They’d be stuck with the rate/terms they’re offered, assuming their lender makes a renewal offer–which they typically do (currently anyway).
    The renewal discussion is somewhat up in the air at the moment because no one knows how OSFI’s new renewal requalification guidelines will affect things.

  3. OSFI would kill the very people and system they’re trying to protect if they prohibited renewals of great than 100% or XX% LTV.
    People would be forced to walk. If they can’t come up with the cash call to lower their LTV at renewal they’re not going to be able to come up with the cash to sell the place.

  4. Hi Joe Q.
    We’ve tried to find a good source of this data, to no avail. It’s certainly a minority though.
    The ratio of our own apps that are 95% financing are in the single digits, but we’re not necessarily representative of the market.

  5. I think OSFI’s primary concern is with the truthiness of lenders’ portfolios in a time of declining asset prices. Banks are famous for overrating their performing loans, then failing to write down impaired loans with depreciated collateral. OSFI wants to ensure that collateral is reevaluated periodically. What they’ll do regarding renewals on devalued collateral is a guessing game.

  6. It’s interesting, because in early 2011 when the CMHC rules were changed to eliminate 35-year amortizations, several mortgage brokers were quoted in the press as saying that “9 out of 10” of their first-time-buyer clients were going the “5-35” route.
    Anecdotal evidence, but interesting nonetheless.

  7. Rob,
    The article talked about certain clients putting 5% down on a $600,000 home. We put roughly 10% on a $640,000 home, and based on our last appraisal, we currently have about 20% equity. My wife and I both have high paying jobs although not into the six figures yet (but close and trending up). Our mortgage is prime -0.85% for the next 5 years. We are paying bi-weekly and increased our payments to the maximum 20% more. Assuming our jobs are stable, will we be ok with a downturn in the market?

  8. Hi I.N.,
    You’re certainly doing a lot of things right. If your monthly obligations are a reasonable ratio of your income and you have a contingency fund, then you’re probably in a good spot. It sounds like you can handle a material jump in rates and there’s enough equity to absorb a sizable drop in real estate values. You’ll build an even bigger cushion in the next few years as you’re accelerated payments hack away at principal. Well done! Rob

  9. Fortunately, the ratio has been dropping, at least based on what industry sources tell us. The 9 of 10 number is/was not representative on a national basis. Sometimes folks have a tendency to exaggerate when being interviewed.
    It also depends on the market. A broker with a young demographic in downtown Toronto will paint a very different picture than a broker from Moncton, NB serving an older clientele.

  10. Downpayment amount doesn’t matter for someone that wants to pay off the mortgage.
    People took houses with 0 down in 2007 and now have 80K left on the mortgage.

  11. What are you talking about? Everyone “wants to pay off the mortgage.”
    Negative equity is a risk for almost everyone buying with only 5% down. The exceptions are people who can pay off large chunks of their mortgage quickly. How many people is that? I’d argue, not many.

  12. Thanks Rob,
    I think the area we fail in is the contingency fund. At the moment, we would have to rely on a Prime +1 LOC to get us through around 6 months of loss of income. We bought our house new so there’s a long list of projects that are vying for our extra cash. But I’m happy to say although we use credit to pay for a lot of our purchases, we pay no interest because it’s paid off every month.

  13. Thanks for the reply !
    In my area this tax is for a property with around 200 K municipal evaluation.
    That’s why I was curious as the home value is higher.

  14. I was wondering we have at least 25% equity in our home and the cottage with 60% and have an option to go 5yrs at 2.99 or 10 yrs at 3.8.The 5 yr a little restrictive the 10yr a little more options. I am sure I will be ok for the renewal at 5yrs and likely not going to be sell either in the 10yr time frame. These properties will always be worth more than I would owe. I remember not that long ago if rates got to 6% I would of signed for life. Is the 10yr ever a good option. Thanks

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