In another month and a half, 100% financing – a.k.a. cashback down payment (CBDP) mortgages – will be eliminated at federally-regulated lenders. That’s being mandated by OSFI’s B-20 mortgage guidelines.
However, provincially-regulated lenders (like credit unions) are keeping CBDP mortgages for the foreseeable future. One such lender is Meridian, Ontario’s biggest credit union (CU).
“We look at our 5% cashback product as prudent, based on who we give it to,” says Rick Arnds, Meridian’s Senior Manager, Emerging Markets. “We’ll hold on to it until we’re told otherwise by our regulator.”
Meridian’s regulator is the Deposit Insurance Corporation of Ontario (DICO). Last time we asked DICO, its Chief Executive Officer Andy Poprawa said it had no plans to curtail CBDP mortgages.
But others we’ve talked to in the credit union world speculate that DICO may change its mind.
Even if it doesn’t, CMHC may put an end to CBDP products.
“CMHC supports the implementation of Guideline B-20,” said CMHC spokesperson Charles Sauriol.
“A separate draft guideline applicable to mortgage insurers is expected to be published for consultation in the near future,” he added. “It is anticipated that this guideline will set out practices and procedures for mortgage insurers that complement Guideline B-20.”
In the meantime, 100% financing will live…outside the banks.
Arnds gave examples of buyers who might potentially be suited to a CBDP:
First-time buyers whose rental costs are roughly the same as a 100% LTV cashback mortgage
Renters with no consumer debt and good employment
A borrower whose money is tied up in their business or investments/RSP’s
“The 4.73% rate also sets peoples’ payments higher, preparing them for future rate increases with less payment shock,” Arnds says.
Essentially, Meridian wants borrowers to be as well prepared as they can be, except for a down payment. Among other qualifications, it requires:
1.5% of the purchase price in cash for closing costs
Despite this, and despite Meridian’s low loan loss ratios with CBDP products, very few individuals are truly suited to 100% financing. Young people have high mobility, and the risk of negative equity (which limits moving options) is material with a cashback mortgage. “No down” applicants also tend to have minimal cash stowed away for unexpected personal or homeowner-related expenses.
Then there’s the obvious cost premium. Even with Meridian’s below-average 4.73% rate and “free” 5% cash, the effective rate of its “100% Financing” mortgage is 1/2 percentage point above a good 5-year fixed rate.
And lastly, it’s a statistical fact that having equity on the line encourages homeowners to make the right decisions, including making sacrifices to avoid default when applicable.
For reasons like these, CBDP mortgages are probably our least favourite example of “mortgage innovation.”