It's obvious that 'innovation' is necessary in the mortgage market place in order to finance "one-million dollar starter homes" in some of our cities.
So what does mortgage innovation look like? In 2003, Scotiabank launched its Free Down Payment Mortgage. The other banks quickly followed. But they weren't the first to do it. So-called alternative lenders like Calgary-based CanEquity Mortgage or Toronto's Xceed Mortgage Corp. have been offering no-money-down mortgages for some time.
As if that wasn't enough, car manufacturer GM had to get in on the deals and they now offer 107% mortgages: because it's always a good idea to leverage more than your property is worth.
"The Canadian cash back program can also be used by someone who already has a mortgage with a rate that is considerably higher than the current rate and is in a situation where it pays to break the mortgage and use the cash back to pay for the penalty costs," [Callum Ross, a Toronto mortgage broker] writes on his website.I'm curious to know who would have those high rates, considering that rates were below 5% for at least 3 years before our current 6% figures kicked in in 2006?
So why would lenders take such risks? Apparently they're not. After all these aren't sub-prime offerings; you actually have to have really good credit ratings to qualify for what David Dodge of the Bank of Canada, in a written expression of dismay, called
products [that] contribute to inflation... and increase the risk of a housing bubble by excessively expanding the pool of potential buyers.But more importantly, these 'alt-mortgages' get [clients] into the mortgage cycle earlier than they would otherwise and
Most importantly, such mortgages entail higher interest rates — typically one or two points above what you could negotiate on a conventional mortgage. And if you want to get out of the mortgage before the end of the term, you'll need to pay back at least some of the gift amount.Sounds like a good deal to us. Where can we sign up? What's that you say? These 'innovations' have a catch?
No sh$t, Sherlock. But that's OK, we live in the buy now do not pay for 18 months era of 'free money' and guilt-less purchasing. After all, if we spend more than we earn, we can just go and refinance our debts into our mortgages, can't we? No wait, we already owe more than our homes are worth and the market value was going up. What a great deal we got ourselves into.
The catch — and you just knew there had to be one — is, boy, will you pay down the road.
with no equity in the home, you essentially start out in the hole by the amount of your closing costs... the mortgage has to be insured by the likes of CMHC or Genworth Financial... This insurance ups your cost, and the lower the down payment, the higher the insurance rate. With a no-money-down mortgage, you're looking at 3.5% or higher of the principal.Wow. Think about that for a moment. You borrow 107% of the market value of your home. Then it costs you 1.5% in closing costs plus 3.5% or more in insurance, so now we're at over 112% of the value borrowed. I know, you could use that extra 7% to cover the closing costs if you are smart. BUT IF YOU WERE SMART YOU WOULDN'T BORROW LIKE THIS.
So there's a particularly good chance you wandered down to Chintz and Co to stock up on glam furnishings prior to hitting up the Mercedes dealership to finance that new C-class you've been eyeing for years, 'wrapping' it all into your mortgage which is a great idea in times of low interest and rising property values.
How can we assume these mortgages aren't smart? Don't take it from me; take it from the pros
No-money-down mortgages — along with long-amortization and interest-only varieties that keep your premiums low but keep you in debt longer — are much more pricey in the end, which is why they don't have many fans among financial advisers (emphasis mine)Considering that most Canadians get their financial advice in their bank, and that in 2006 CIBC reported "that non-traditional mortgages are growing by 50% a year" I'd say this market's practices are gonna be OK...
"Over the next five to 10 years," [CIBC] noted, "innovation in the mortgage market will accelerate at a pace not seen before in Canada."