BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

Although the days of 100% financing appear to be over, there are still various ways of entering the real estate market with only a little bit of money in your pocket. Let’s see how we can get you into the market.

It may be your best financial decision ever to purchase a home for yourself and stop renting - but it takes financial dedication to get into a home.

If you have access to enough money, you could purchase a home without any form of financing. If you have access to a at least 20% cash of a home’s value, then you may qualify for conventional bank financing. The law states that a mortgage to 80% of a home’s value does not have to be insured (with mortgage loan insurance) – which is the principle of “conventional” mortgage financing. However, if you need to finance 81% of its value, then mortgage loan insurance is mandatory, adding a substantial sum to your financial burden. The added sum comes from the premium for mortgage loan insurance. Luckily, you can add this sum to the mortgage and pay it off along with the rest of the mortgage loan.

Mortgage loan insurance will cost you Thousands of Dollars. The premium table is shown here on the CMHC website:  http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm. The premium table also suggests that the fee will go up under certain circumstances, such as for those that are self-employed or need more than 90% financing. I those cases (example of a $400,000 home purchase), your premium alone can be almost $20,000.

The only way to avoid these premium fees is to keep the mortgage amount to a maximum of 80% of the purchase price of the home. In other words, you’d need to cough up 20% of the price of your home in cash or cash-equivalent.  The threshold for mandatory mortgage loan insurance is 80% LTV, as bankers call it (Loan to Value ratio). It simple means you have to supply 20% of the purchase price to avoid the mandatory mortgage loan insurance altogether.

The easiest way to afford buying a home is, naturally to have some cash. The more money you don't have to borrow, the smoother your purchase will be.

FORGET ZERO DOWN

When buying a car, some manufacturers will lure you in with “zero down” offers. What they’re saying is that you can drive out of the dealership without paying any down payment. You can finance the whole deal, even the sales tax. Some manufacturers even soften the deal with additional “free” months. No such offers are available in real estate. You must have money – or access to money, to get into real estate in Canada.

The least you have to put down is 5% of the purchase price. This is the threshold before you can even begin to qualify for an “insured” mortgage loan. In other words: if you have less than 5% down, you do not qualify for a mortgage loan. If you have 5 to 20% down, you may qualify but only with mandatory mortgage loan insurance. And if you have 20% of more down, you may qualify without mortgage loan insurance.

Some will point out that a mere 5% down is basically the same as no down payment. This is, because the addition of the premium for mortgage loan insurance pushes the loan very close to “zero down”. If you also have to pay general closing costs (for instance the property purchase tax), you could technically even surpass the zero-down threshold.

One way to secure real estate cash is to ask around if there are perhaps loved ones who wouldn't mind getting you started: a gift, a loan, a cost-share, it all might work.

HOW MUCH DOWN, REALLY?

There is some flexibility on how you must acquire this 5% down payment. This could be from savings, obviously. But it could also be from a gift (family member, for instance). There’s also the possibility to borrow from your own RRSP – that’s a tax-free operation as long as you pay it back to your own RRSP in easy annual instalments.

Unless you fall into an exemption category (such as being a first time home buyer in a certain price category), the property purchase tax alone will amount to 1 or 2% of the purchase price. There are other costs as well: legal, inspections, hook-ups, registration fees and unexpected little annoying things. This is before you pay the movers and start redecorating, gardening or even better: renovating.

The possibility of 100% financing was trashed a few years ago. Thus, you should count on 5 to 10% when you’re including all the other costs; this is just to get started. Realistically speaking, you should also have a slush fund for various costs and expenses that will be coming at you at some point: property taxes, maintenance and unexpected surprises.

Banks believe and will insist that you need a (fairly steady) income to pay back any mortgage loans you take out. There's some logic to that, of course.

NO INCOME, A PROBLEM

In Canada, it’s near impossible to secure a mortgage loan when you have no income, no job and no assets. In the US, these kinds of loans were regularly made available during their market bubble; the one that resulted in the nasty real estate crash. That’s the one that rippled through the economies of most of the world. This is a clear example of a whole different banking and debt culture amongst neighbouring countries.

Our so-called high-risk Canadian mortgage loans need not be a problem. However, they sometimes turn out to be one of those products that aren’t a problem until there IS a real problem, such as a market crash. High ratio mortgages are sensitive to the trends in the real estate market which is all fine when the market is going up. However, when the market goes down just a few percentage points, it’s immediately possible that you owe more on a property than it’s worth.

In Canada, with the effective mortgage regulation by CMHC, truly high-risk mortgage loans are virtually impossible. We have the “stated income” loans that get administered sparingly. Not many people qualify for those because the criteria are tightly controlled – and correctly so. Even then, one has to be financially very strong to fit into the “stated income” category. CMHC’s mortgage products may be conservative (as in boring) but they are safe and keeping our financial system straight up.

CMHC also says that more than half of CMHC-insured mortgages have a loan-to-value ratio of less than 80 per cent (based on the value of the original loan). It also says that the average equity in a CMHC-insured property is 45 per cent. The mortgages are getting paid down; some people even make extra payments (more than just the minimum required principal payments). Of course, rising home prices have also helped improve the debt picture.

If you've been able to make $1200 a month in rent payments, does that mean you'd be automatically approved for a loan costing you as much? The banks don't think so.

WHY DO WE HAVE MORTGAGE RULES?

Now that it’s been a few years since the Big US real estate market melt-down, we can fairly comfortably comment on it – always so easy in hindsight. Ever since their bubble burst, we’ve been flooded with predictions that we could be next to endure a melt-down. This hasn’t happened and I believe that most people hope and expect this not to happen in Canada. It might be because of our financially less-risky lifestyle choices, because of our conservatively-natured banks, our traditionalist lending practices and (last but not least) because CMHC’s insurance products have been fairly “boring” (safe).

If there were ever a housing crash, it’ll be the taxpayers (not necessarily the banks) that are ultimately on the hook. Right now, CMHC packs away Billions of Dollars in premiums, making it an extremely profitable Crown corporation – to all our benefits. If things ever went completely sideways, then CMHC would stop contributing to the public coffers, which would hurt us all financially. If things got EVEN worse, we’d have to start subsidizing this Crown corporation – imagine that!

Most observers agree that there’s no need to worry about CMHC’s solvency, just yet. On the contrary, actually. What they do say we need is more transparency and oversight at CMHC so that we know what’s really going on there. We love home ownership, it’s good for the country and it’s good for society – but not at any cost.

From a banker's perspective, there is a lot of logic in mortgage rules. I will help if you can see their point, the blog articles below might help a bit.

MORE reading about mortgages and finance matters:

Financial strength explained: http://www.mennorealty.ca/Blog.php/immune-to-troubles

The cash value of your mortgage:http://www.mennorealty.ca/Blog.php/mortgage-right-now

What’s that, a credit score: http://www.mennorealty.ca/Blog.php/mortgage-connection

Financing with a fixed of variable mortgage? http://www.mennorealty.ca/Blog.php/eternal-mortgage-question