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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.