March 13, 2012
How much home could your rent buy?
March 05, 2012
Should you buy your home with no down payment?
In the media, the big focus is on concerns that Canada may be making some of the same errors that led to the U.S. real estate and mortgage crisis, and that Canadians are just too overextended on credit.
As well, with any financial decision, there is the question of whether that decision is appropriate for your own personal situation.
Let's address the media attention on the Canadian housing market first.
It’s always important to be cautious, and, dare I say it: conservative. But, to keep things in perspective, our financial system is sound, and the majority of Canadians remain sensible with their financial management. Bloomberg, a leader in global business and financial information, recently noted that the Canadian Banking system has been rated the soundest in the world for four straight years - with no Canadian lenders needing a government bailout, unlike the U.S. and European banking systems. And, according to Canadian banking industry figures, the percentage of mortgages in arrears in Canada currently sits at .38 of one percent, hardly a red flag for loan quality in Canada. A recent report by one of our major banks also stated that Canada’s housing market is more a balloon, than a bubble. So our stricter banking rules have certainly helped us avoid making the same mistakes made south of the border.
Now let's look at whether this is the right strategy for you. Simply put, buying a home with zero down isn’t for everyone. You need to have stable income, excellent credit, and the ability to comfortably handle both your monthly mortgage payment and ongoing housing expenses. If all those apply to you, buying a home with no down payment could be a significant financial boost. If you are struggling to save up your down payment while paying out a large chunk of your paycheck to a landlord, it could be the way to make the step to home ownership much sooner. For some home buyers it can make more financial sense to take advantage of today’s historically low mortgage rate environment instead of waiting.
Most first-time buyers look to save five percent of the purchase price, which is the minimum down payment required to qualify for an insured mortgage. Zero down options cover some or all of that five percent, and include:
1. Borrowing the downpayment through a loan or unsecured line of credit;
2. A cash-back mortgage that provides the cash upfront; or
3. Having the down payment gifted to you by a parent or other blood relative with a letter saying you are not required to pay the money back at any time.
Talking to a mortgage professional is to see if this makes sense for your situation is very worthwhile. We can outline all of the details that you should be aware of with each option. For instance, cash back mortgages have higher interest rates, and, if you pay out your mortgage before your term is up, you’ll be required to pay back a pro-rated amount of the downpayment that you received. Or, if you borrow the down payment, the loan amount must be used in your qualifying calculations, and you might not qualify for as large a mortgage (see my post on ratios for more details on these calculations).
You do also need to have an additional 1.5 per cent saved to cover all of your closing costs (see my post on closing costs for more details).
Bottom line: if you’re in the “saving up” stage of preparing for home ownership, this is a great time to meet with us so we can discuss your down payment options, including, if appropriate, the possibility of buying your home with no down payment.
Talk to us today; it’s a great place to start!
~ Powered by Mortgage Intelligence
Photo credit: [c] Colin Brough for stock.xchng
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