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Canadians who have been madly
saving for the minimum five percent down payment required to
buy a new home and qualify for mortgage loan insurance can
now forget about it. Down payments have just gone to zero.
Our federal housing agency, Canada Mortgage and Housing
Corporation (CMHC), has expanded eligible down payment
sources to enable many Canadians to realize their home
ownership dream sooner than what would otherwise be
possible.
As of March 1, 2004, the down payment may come from any
source including lender incentives and borrowed funds.
Previously, would-be homeowners were required to provide the
down payment from their own or immediate family resources.
However, borrowers will still have to prove their ability to
meet their debt commitments in order to qualify for mortgage
insurance.
CMHC experts predict that Mortgage lenders will be offering
Canadians a variety of mortgage product offerings under this
new program, including mortgages with terms as low as six
months and fixed, adjustable and capped interest rate loans.
CMHC has long acknowledged that for most people, the hardest
part of buying a home, especially the first one, is saving
the necessary down payment. The original minimum down
payment of 25 percent of the purchase price meant that home
ownership was not possible for a large segment of the
population. As a result CMHC introduced Mortgage Loan
Insurance to lenders. Through this program, CMHC enabled
Canadians to finance up to 95 percent of the purchase price
of a home. This meant, for example, that someone wanting to
buy a home for $125,000 would need just $6,250 or 5 percent
of the purchase price as a down payment. At 25 percent of
the purchase price they would have needed $31,250.
Mortgage Loan Insurance, which is purchased through the
lender at the time the mortgage is arranged, protects the
lender against payment default. This insurance should not be
confused with Mortgage Life Insurance which is personal
insurance designed to pay off the mortgage should the
borrower die with debt outstanding. Along this line, there
is also available mortgage insurance which will make
mortgage payments in cases of job loss or health problems
that keep you from earning.
Mortgage eligibility will still include conditions like the
following:
The home which is to be occupied as your principal residence
is located in Canada.
You can demonstrate that you have a down payment, that is,
the difference between cash and mortgage principal.
Your home-related expenses do not exceed 32 percent of your
gross household income based on Gross Debt Service (GDS)
calculations.
Your total monthly debt load does not exceed 40 percent of
your gross monthly household income according to Total Debt
Service (TDS) calculations.
While saving a down payment may no longer be essential to
home buying, it may or may not make home ownership more
affordable in the long run. Although appealing at first
glance, examine your situation from all angles before making
commitments on paper.
Written by PJ Wade
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