Cash-back Down Payments Dead Next Week

The door is closing on one of the last remaining forms of 100% financing. On June 30, insurers are banning cash-back down payment mortgages.

Only a handful of lenders still market these products, and they’re all provincially regulated credit unions. OSFI has effectively barred cash-back down payment mortgages at the federal level (e.g., at banks).

Despite questions about the risk of these products, they’ve been an almost insignificant concern for the mortgage market. The fact is, their uptake has been extremely low. Most people find a way to scrape up a 5% down payment and avoid paying posted rates for 100% financing. Moreover, the only borrowers who qualify for these no-down mortgages are those with pristine credit, solid employment/income prospects and low debt ratios (i.e., a strong borrower, albeit one with little equity).

With the demise of this product we may very well see an uptick in unsecured line of credit (ULOC) usage. Insurers will still permit the minimum 5% down payment to be borrowed from ULOCs, as long as that credit line payment is factored into the applicant’s total debt service (TDS) ratio. In fact, the mortgage lender itself can provide that ULOC, and a few may even start actively promoting it.

Homeowners who borrow their 5% down payments must pay an additional 0.25 percentage point default insurance premium. That’s on top of the recently increased 3.60% standard premium for 95% loan-to-value financing.

 

  1. First — buying a house when prices are viewed as overvalued (see here: http://www.theglobeandmail.com/report-on-business/top-business-stories/the-greek-crisis-it-could-get-ugly-again-fast/article25075986/ and here:
    http://www.theglobeandmail.com/report-on-business/video/video-mind-the-gap-us-and-canadian-home-prices-diverge/article25090689/ for some of the recent evidence) AND

    Second, doing so using maximum leverage (100% financing),

    = a good way to put yourself in a risky position.

    Let’s say you purchase a $700k house with 100% financing. Let’s say your average interest rate over 25 years is extremely, extremely low — roughly 3.5% over a 25 year period. You will be paying more than $1.04 million in total payments over the 25 year period. If your average interest rate is still low — 4%, we’re talking $1.10 million. (This does not include any annual property taxes or maintenance fees).

    Even if one could get the 100% loan, the crunched numbers are starting not to make sense for many people to buy.

    And this is all in the context of time when US interest rates will begin to increase. (Note: Not counting the euphoric time just before the dotcom and US housing bubbles, US unemployment rate has not been this low since the early 1970s!

    Slow US rate increases are coming. What does that mean for Canada — either match, or if not matching, CAD will depreciate and we`ll import inflation through higher import prices, leading to eventual rate increases.

    1. Don’t be deceived by low unemployment in the US. A record 93 million Americans aren’t even counted in the labour survey anymore. Many of these people want jobs but remain long-term unemployed.

      1. Why do you reference a number “93 million” when many of those people are retired or too young to work. Point is, people who are in the labour force are finding jobs and the unemployment rate is in the 5% range.

        Peopl will fuss and whine about the quality of jobs and the (very slightly) lower participation rate, but nonetheless, the 5% figure is very telling. We are getting to the point of full employment and wages wll then be begin to be bid up.

        Such emergency low rates are no longer justified. Just an opinion, they probably are not rising fast, but roughl 1% a year will cost people alot more in interest for nothing addiional in return. The aggregate impact of rising rates is dropping prices.

        Canada homeowners benefited immensly from dropping rates, given the short-term nature of our mortgage terms. With rising rates, this will work in reverse, where more and more people will be renewing into higher rates. (5 year mortgage is not really all that long compared to other countries).

  2. Daniel Moore touches on a good point. Many people only look at the current payment amount and interest cost over the life of the mortgage and use that to guage affordability. One must consider future property tax increases, maintenance and repairs, home insurance, as well as future rate increases along with inflation. There are people getting in way over their head at today’s prices and just barely qualifying using the current debt ratio calculations. Add to the fact the low Canadian dollar, which has already begun to inflate food prices for example, and near stagnant wage growth and its clear this is a disaster waiting to happen in some markets.

  3. Great insight on the potential growth of PLOC’s providing DP. Likely you are dead right. Thankfully I believe 100% financed 5% down purchases are an extremely small percentage of the market. At a recent conference we both attended the biggest broker lender in Canada revealed that their insured versus conventional purchase mix was declining 1% per month to the point that 75% of all purchases are now conventional whereas 2 years ago it was 50 / 50. conventional versus high ratio.

    1. Thanks Ron, That bank’s growing ratio of conventional mortgages was eye opening. It highlights another trend as well, the fact than many non-deposit taking lenders can’t compete as well for low-ratio mortgages — due to regulatory intervention that keeps increasing funding costs.

  4. Too much fuss about it, Reality is that bankers still offer LOC for clients to use it for DP and closing costs even if they dont offer this *product or get into this rule.
    Some big banks have such a leverage on the insurers and they don’t have to show paper trail of what they do…

    1. Joel, while I agree with you that DP can occasionally come from borrowing at branches please know that the MI’s don’t often look at the paper from banks other than at the point of a claim. I assure you when the claim occurs the paper will be reviewed and bad files will have claims denied

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