The Zero Down Mortgage

I get a lot of people asking me if they can buy a house with zero down, as were able to a year or so ago. Rest assured the “zero down” mortgage is here, through Laurentian Bank. How does it differ from other cash-back options from places as TD and Firstline? Easy: Laurentian forwards the 5% cash-back portion direct to the lawyer! This is a huge competitive advantage as opposed to the other lenders. They make the clients have the full down payment and closing costs up front - what’s the point? There is no point! If they had it, they wouldn’t be paying a higher rate would they?

Laurentian’s current offer on a zero-down is 5.29% but is expected to go up anytime. Remember: your clients will need some money available, typically 2-3% of the purchase price. Laurentian provides 5% of the mortgage amount, not of the purchase amount, so there will be a shortfall. Nonetheless it is an extremely attractive opportunity for you to market to your clients.

If you want to a rent-vs-buy analysis, let me know and I can help you out. Although 5.19% sounds high, recall that a short 2 years ago that was a very competitive 5-year fixed rate.

Thanks for reading, chat soon.


Zero Down Mortgage

A Realtor called me the other day to ask a very important question: “How can I get my clients into this house with very little down payment?”

My first question is to find out if the client really doesn’t have any extra funds for a down payment, whether it is through savings, a gift, potential bonus at work, or perhaps using their Line of Credit. If not, the discussion goes further into the good and bad things about a cash-back (or “almost” zero-down mortgage).

The good:

Historically speaking, the rate for a 5% cash-back is the same that the rate was for a 5% fixed mortgage, just a short 2 years ago. At 5.19%, that’s an excellent prospect moving forward.
It gets you into the door of a property however since the qualifying guidelines are rather strict, not just anyone can be approved for a mortgage like this - a very good thing.

The bad:

Just as the rate is a good thing, it’s also a bad thing. Why? Today a 5-year fixed is as low as 3.39% vs a 5-year 5% cash-back at 5.19%. The difference can be enormous in payment and end principal balance.
If you sell your property before 5 years, you’ve not only paid the high rate but also must pay the balance of the cash-back, back. Not an easy thing to do if the property values do not continue to rise.

So how does it work? It’s like so. If a client is buying a property for $400,000, with a 5% down / 5% cash-back mortgage, they would get 5% of the mortgage amount ($380,000), not 5% of the purchase price. Therefore, the client must have some money to cover the difference + closing costs. As so, for a $400K purchase, it would…


A Question From A Reader About Second Mortgages

Yesterday I received an interesting question from a client of mine who is very financially savvy and smart. Here it was:

For someone that is currently locked in a mortgage at a certain fixed rate, what’s to stop them from taking out a 2nd mortgage at a (much) lower rate and take the proceeds to make large pre-payments (as much as they’re allowed) towards their 1st mortgage?  I’m talking for someone like myself who has 5 or less years left on my amortization period, so the actual pre-payments (say 15%) will be significant percentage of the outstanding principle

Would this be this allowed, and if so, what are the pros and cons?

Although a great idea in principle, it will not work for a few reasons. A second mortgage should be seen as a last potential spot for lending, whether you are tapping the equity in your home for a debt consolidation, investment, or other purpose. Reasons for this are a second mortgage will cost you both a high rate per month, AND legal / lender / broker fees. Typically speaking a second will run from 7 to 15% in interest - however it is only the interest portion you are paying. You are also paying on average 2-3% in total lender fees.

To put some numbers out there for you:

House value $400,000
First Mortgage $280,000

Typically a lender in second position will go to max 80% of the value of the home, or $400K * .80 - $280 or $40,000 to lend.

That lender will usually lend this for a 1-year term at let’s say, 12%. They will also add a fee of 2.5% + set-up of $500 at the legal side. Total cost to borrow $40,000: $1500

Since the payments are interest-only, you’re responsible for a…


A Note On Construction Financing

Generally speaking Construction Financing is given based on end value of the property. The maximum that most private lenders will finance is to a maximum of 75% of the value on the finished product. To give numbers to this scenario:

Let’s say you have a piece of land that’s worth $600K with a mortgage of $300K (most land financing goes up to maximum of 50%). The project you wish to build will have an end value of $1M. The end value is determined by an appraiser and is based on drawings, plans, permits and cost estimates. A lender may be willing to go to 75% of that total minus the value of the 1st mortgage, so in this scenario that would lend up to $450K to finish your project. However, you never get all the money in one lump sum. Instead, in order to make sure the construction program is being executed appropriately, the money is given in a series of draws with a 10% hold-back each time, based on the appraisal at the time of each draw. In our situation here, the lender would give 33% of $450K each time a phase of the project is finished, and 10% of that is held back until the end. As such, a client must have at least some capital in order to undertake this so they are able to pay their contractors and continue on.
Private lenders may go to 75% of end value, where as institutional lenders like CMHC will go to 65%. Private lenders are more expensive but are also able to provide more funds.

Construction financing is also not cheap. Privately, it’ll run you to 9% to 15% in interest (interest-only payments), and 2-4% lender fees. Institutionally would usually be about 3 points less in the rate…

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