This spring we are meeting more and more first time buyers with excellent income but who lack even a 5% down payment. They don’t want to miss out on the hot real estate market, and are looking for ways to get in sooner rather than later.
A few months ago we published an article called Five ways to buy a home with zero down payment. This proved very popular with first time buyers.
Not everyone is blessed to have parents with deep pockets (who have lots of home equity they can tap into). Borrowing the down payment could be the answer. If you don’t already have available, low interest rate credit, you will need an excellent credit rating, husky household income and some guidance in choosing the best borrowing solutions out there.
Genworth Canada, one of Canada’s three mortgage insurers (CMHC and Canada Guaranty are the others) have a program specifically for these circumstances. It is called the CASHBACK EQUITY/BORROWED DOWN PAYMENT PROGRAM for purchases with a down payment of less than 10 percent.
The key is to ensure your debt servicing ratios will still be in line even after you tap into your personal line of credit or low interest credit card. This is because Genworth will attribute a monthly payment of 3% of the amount you borrow when calculating your debt service ratios.
So if you borrow $20,000 to prop up your down payment, your mortgage lender will factor in a monthly payment of $600 towards servicing this debt. You can see why this approach works best with borrowers with excellent household income. RateHub has a good explanation of debt service ratio calculations here
The Genworth program favors high credit scores. If your credit score is greater than 680, your GDS and TDS ratios can be as high as 39% and 44%. Otherwise you will fit into the 35%/42% category.
You can even borrow your closing costs (land transfer tax, PST on the mortgage insurance premium, legal fees and disbursements, etc.) Setting aside at least 1.5% of the purchase price is wise, especially if you live in the GTA where land transfer taxes are charged by both the province and by the City of Toronto. These funds may be borrowed provided any associated repayments are included in the TDS calculation based on a 12-month repayment period.
The mortgage insurance premium with this Genworth Program is currently 3.35%, versus their normal 3.15% for loan to value ratios in the 90.01% to 95% range. And after June 01, 2015 you can expect all such premiums to increase to 3.85% and 3.6% respectively. Here is today’s news update from Mortgage Broker News.
Where to borrow the money?
This really depends on your personal circumstances. (1) If you don’t already have a personal line of credit, you could apply for one from your bank, trust company or credit union where you do your personal banking.
Royal Bank’s personal line of credit (PLC) is typically set up so that your minimum required monthly payment is interest only – so if you expect cash flow to be a bit tight in the months following your home purchase, this can be a godsend.
Suppose you borrow $20,000 from your RBC PLC at Prime plus 4%. Today’s prime rate is 2.85%, so your minimum monthly payment would be around $115. (Again, remember your mortgage lender will still have to impute a monthly payment of $600 when assessing your application)
(2) If you have credit cards with high limits and an excellent repayment history, you may receive offers in the mail from time to time offering very low rates on balance transfers. Check these out and see if they could work for you.
(3) There are a few credit cards out there with excellent ongoing low interest rates. TD’s Emerald Visa’s rate can be as low as Prime plus 1.5% for example.
(4) Or you can apply for a new credit card which offers you a limited time low interest rate product. For example, MBNA has the MBNA Platinum Plus MasterCard.
I would definitely NOT want to carry a balance on this card after the end of the first year I had it, but for the first twelve months you can tap into its entire available limit at 0% interest. There is no annual fee for this card. There is a 1 percent admin fee on all balance transfers.
The money does not have to be transferred onto another credit card – you can even request it be deposited into your checking account. The minimum monthly payment can be as low as one percent of your outstanding balance.
There are other very good new credit card offerings available to you with similar limited time interest rate promotions. Please be careful not to overdo this. One application is far better than trying several. Otherwise you may be seen as a credit seeker if you go overboard, and possibly even jeopardize your mortgage application.
This is not an approach for everyone, and the net result can be you will buy your home entirely with borrowed money. You need to have excellent income, stable employment and a long term view that you won’t panic even if home values ease a bit after you buy. If it appeals, talk to your trusted financial adviser to see if it may make sense for you. But if you are planning to take the plunge this year, you will save 0.5% on the mortgage insurance premium if you have a lender commitment in hand before June 01, 2015.
Rob Carrick of the Globe and Mail weighed in with this comment: ” Adding it to my list of signs of an overly hot market……it’s not the borrowing of the DP itself, but rather the hot-market mindset that tells people to forego the discipline of saving for a DP.”
Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. firstname.lastname@example.org
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