Hey, welcome back, it's Nolan Matthias from Mortgage 360
and today we were discussing zero down payment mortgages.
Are they still a thing? Yes.
Can you still get them? Absolutely.
Are they the right thing for you?
Maybe, maybe not.
And that's what we're discussing in today's video.
But before we get into it, do me that favor,
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Okay, so let's get into it.
Let's discuss zero down payment mortgages,
because, yes, they're still a thing,
but they aren't what they used to be.
In the past, back in 2006, 2007,
you could walk into a bank and you could say,
hey, I want to get a mortgage
for 100% of the value of a property.
They'd say, how much is it?
You'd say, it's 400,000,
and they'd give you a $400,000 mortgage,
plus the CMHC insurance premium,
so you'd end up borrowing for about 104,
105% of the value of the property,
and that was totally cool back then.
But then the financial crisis in 2008 happened,
and nowadays you can't get a 100% financing,
but what you can do, is you can borrow your down payment.
And what that looks like is you borrow 95%
of the value of the property from the bank,
that's the maximum amount that you can borrow
as an insured mortgage,
and then from there you borrow 5% off
of something like a line of credit
or a credit card or a personal loan.
Now, borrowing that 5% down payment is the tricky part,
because you need to qualify,
not just for the 95% mortgage that you're getting,
but also for the 5% loan that you're getting
on a credit card or a line of credit
or wherever you're getting it from.
And that is what limits your ability
to borrow as much as you possibly can,
and it also creates a scenario
where you've now got two payments,
one for the mortgage that you qualified for
and one for the down payment,
which can be financially stressful.
And let's call a spade, a spade here,
having two payments,
when you haven't been able to save a down payment,
is going to be something
that is going to be financially stressful.
Because if you haven't been able to
put yourself in a position
where you've been able to sock away enough money
to actually have a down payment on a property,
then all of a sudden having two payments
is definitely going to be financially stressful,
because here's the deal.
If you're borrowing off a credit card,
you're going to be paying an astronomical interest rate.
If you're borrowing off a line of credit,
you're going to have a pretty big payment.
Typically they're 3% of the balance,
so let's say you're buying a $400,000 property,
you're putting $20,000 down,
you're borrowing that off a line of credit,
well, your payment's going to be about $600 a month.
So, neither of these options are ideal.
Now, proponents of this product
will tell you that property values only go up,
and the reason why you need to borrow your down payment
is because if you don't, you might miss out on equity.
Let's say it takes you three years
to save your down payment,
well, you might miss out on three years worth of gains.
Well, what I'll tell you unequivocally
is that the people who are purchasing
because they feel stressed
that property values are going up so fast,
are typically the people
who are buying at the top of the market
and end up in a negative equity position.
Now let's talk about that.
Let's talk about the other side of property values going up.
What if property values go down?
Because here's what this borrowing situation looks like
from an equity perspective.
When you borrow with a borrowed down payment,
you're borrowing 95% of the value of the property,
then you're borrowing with the 5% down payment,
then on top of that, you're gonna have an insurance premium,
which is four and half percent.
So from day one,
you're financing 104% of the value of the property,
which means from day one, that you are underwater.
And if property values don't go up,
or if property values stay stagnant,
you stay underwater for quite a significant amount of time.
And if you're buying at the top of the market,
which it very well may be for Toronto, Vancouver,
and different parts of the country,
then you're potentially putting yourself in a situation
where you aren't going to be able to sell your property
for the next five to 10 years.
And we've seen clients recently who bought in 2007, 2008,
who are still underwater on their property,
13, 14 years later,
because they purchased with 100% financing
at the top of the market.
So, this is a scenario
where you can get yourself into trouble really quick,
and where you aren't able to sell a property
because you owe more than what it's worth.
And that leads to things like foreclosure and bankruptcy.
That's why these products are so dangerous.
So you need to consider that,
if you're considering a borrowed down payment.
And that potential to be underwater so quickly,
is the reason why CMHC, in June of 2020,
decided not to do borrowed down payments anymore.
Now, yes, you can still get a borrowed down payment
from Sagen, which is formerly Genworth Financial
and Canada Guarantee, however,
CMHC saying, we aren't interested in doing these anymore
because they're so risky,
should be a pretty good indication,
to the market and to consumers,
that they are a very risky product.
And this is a product that I believe can get people
into financial trouble really, really quickly.
In fact, at Mortgage 360, we have done
zero flex down mortgages over the last five years,
primarily because of how dangerous they are.
And just because a product is available in the market,
doesn't mean that people should necessarily
be taking advantage of it.
The only time I would ever really consider
doing a borrowed down payment mortgage for somebody
was if they were purchasing a property for a family member
and wanted to borrow the funds off a secured line of credit
while purchasing with less than 20% down.
And they would need to have
a pretty substantial amount of funds in liquid assets,
so stocks, bonds, RSP, something like that,
for me to feel comfortable with it.
So, like all other mortgage products,
just because it's available,
doesn't mean you should necessarily use it.
There are certain cases where it does make sense,
but for the majority of borrowers,
this is not the right type of product
to be purchasing your first property with.
The right way to purchase a property
is to actually save a down payment.
And if you're considering a borrowed down payment,
don't do that.
Consider this, go get a side hustle,
go get a second job, start flipping stuff off Kijiji,
find another way to make the funds
so that you can save a down payment faster.
And what we've seen in the past
is that if somebody is really truly set
on getting a down payment and purchasing a property,
they typically only take five to six months
to save the down payment
because those who are motivated enough will find a way.
We've seen it time and time again,
where people just go and start little side businesses
in order to make sure that they save that $20,000,
so that they can buy a place,
rather than having to borrow the funds
and end up in a situation where they're in financial straits
because they borrowed the money.
So, if you found this video useful, do me that favor,
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Cheers, we'll see you on the next video.