No Down Payment Mortgage Loans - Cash Back Mortgage
One of the strategies to arrange no down payment mortgage loans is to choose a 5% cash back mortgage.
The minimum down payment required to purchase a home in Canada is 5%. First time home buyers choose a cash back mortgage instead of a discounted mortgage and use the cash back toward the down payment.
Many lenders wonít tell their clients that this is available because they donít allow it, however a number of lenders do allow this very strategy!
Cash back mortgages can range from 1% to 7% of the mortgage principle. The interest rate increases as the percentage of cash back increases.
Let's look at an example:
Sally and her boyfriend Chris purchased a home for $350,000.00 in December of 2010. They hadnít saved the 5% down and considered the 5% cash back mortgage to finance their purchase.
Sally had gone to her bank to get qualified for this purchase. Sallyís banker told her no down payment mortgage loans were not available. Sally was told that she needed to have saved at least 5% down to purchase a home.
Chris had met with his brotherís mortgage broker. The broker explained that there are a couple of lenders in Canada that will still help Chris & Sally to arrange a no down payment mortgage loans. The lenders are not allowed to finance 100% equity mortgage loans but can utilize a cash back option to effectively finance no down payment mortgage loans.
The lenders that allow this consider the cash back as a ìnon-traditionalî down payment. There is a slightly higher premium of 0.15% added to the high ratio premium for non-traditional down payment mortgages.
The mortgage broker explained that Sally and Chris have to meet a couple of criteria to qualify:
- Good credit (a minimum beacon score of 650 is required)
- Have enough savings to cover the closing costs (calculated as 1.5% of the purchase price)
The 1.5% calculation for closing costs is an estimate of actual costs. Some of the closing costs would include:
- Legal Fees ($1000 - $1500)
- Title Insurance Fees ($300)
- Moving costs (case of beer & pizza, utility set up fees)
- Land Transfer Taxes (if applicable, in the province they purchase their home)
Sally and Chris met these criteria and proceeded with the financing.
A review of the image/table above outlines the difference between arranging a mortgage with 5% cash back for down payment and a traditional mortgage without cash back.
The cash back outlined here is used toward the down payment and therefore the High Ratio Premium is increased by 0.15%.The monthly payment for the 5% cash back is higher than the monthly payment without cash back. Over 5 years, this difference is almost equal to the cash back amount they receive when the mortgage is set up.
Sally and Chris also heard from their broker that there is another option utilizing the non-traditional down payment program that didn't involve a cash back and higher mortgage interest rate.
There is another "non-traditional down payment" no down payment home loans strategy that involves arranging a loan for the down payment instead of receiving cash back. Visit No Down Payment Home Loans to compare.
Check to see if you qualify for a mortgage with little or no money down. Complete a Quick Application.
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