January 22nd, 2021

Finding a suitable mortgage

By Submitted Article on April 18, 2020.

Dear Money Lady: I am 72, retired and a widow. I like living alone and keep myself busy with friends and hobbies. Recently my son and his new wife moved in with me to save money. While I do like the company, it is very tight in my little house. One of my friends told me that my son could buy a home with zero down. What exactly does this mean? My son is trying to save to buy a home, but with house prices continuing to go up, I am worried he will never leave home again.

Sincerely, Gladys, Empty-Nester No More!

Dear Empty-Nester No More!

Your question is one that I get asked all the time and I am glad to answer it. In 2004 all the banks were offering a true “zero-down” mortgage and were essentially gifting new home buyers with the required five per cent down in the form of a cash back. Of course, this cash-back offer was recouped to the banks in the lending rate which was offered with no discount, often times being considerably higher than conventional rates. But it was a great way for buyers to get into the market with very little saved. Today, with all the government-mandated changes, big banks do not offer “zero-down” mortgages.

If a buyer is unable to put down the required 20 per cent of the purchase price for a conventional mortgage, they would then have to be approved for a high-ratio mortgage. A high-ratio mortgage, also called an NHA mortgage, is for deposits of less than 20 per cent with the lowest required down payment no less than five per cent of the purchase price. If your son wishes to purchase a home with less than 20 per cent down, he would need a high-ratio mortgage. There are many government-approved NHA providers with the most popular being CMHC (Canada Mortgage & Housing Corp.).

Today CMHC, together with the Canadian government, are now providing a similar cash-back offer like we had years ago, called a “first-time home buyer shared-equity plan.” Unlike the offers in the past, clients still receive competitive low rates as if they were conventional home buyers.

For those buyers who have five per cent down, CMHC will match the five per cent on a resale home or provide 10 per cent on a new build for a first-time homebuyer owner-occupied primary residence. This is a great deal for buyers wanting to get into the market, although it is not free money. The new buyers will have the funds interest free and are not obligated to pay it back until the end of a 25-year amortization, unless the property is sold, therefore having to pay it back upon sale. There are some conditions: qualified buyer’s joint incomes cannot exceed $120,000 annually and the maximum purchase price cannot exceed four times the income after the down payment. So, as an example, if your son and daughter-in-law together earned $80,000 annually, the maximum insurable mortgage they could acquire would be $320,000 or four times their income. A five per cent down payment would be $16,000 which CMHC would match upon qualifying. That means they would have $32,000, ($16,000, your son’s funds, + $16,000 from CMHC) added to their purchase price so they could safely buy for $352,000 and soon be on their way to building independence, equity and wealth!

Just as a side note, the definition of a “first-time home buyer” has changed. Now anyone can qualify as long you have not owned a home in the last four years. Great news for people who are wanting to get back into the real estate market. I hope this helps and you can soon “re-launch” your son out of the nest again!

Good luck and best wishes,

Money Lady

Written by Christine Ibbotson, author of “How to Retire Debt Free and Wealthy.” Follow on Facebook & Instagram. If you have a money question, please email: askmoneylady@gmail.com

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