In numerous countries around the world no down payment mortgages had become quite popular in the run-up to the 2007 recession and housing market crash in the US, but now they’re not quite so popular, at least not with the lenders! A zero down mortgage, or no down payment mortgage, basically means you’re getting a mortgage loan for the entire cost of the home you’re buying and this puts a lot of risk on the lender. In a rising market the lender doesn’t have too much to worry about because if the homeowner defaults on their mortgage payments the bank can always foreclose and get their money back, but if the home decreases in value, the bank stands to lose out.
Zero Down Mortgages Banned!
All this aside, since October 2008 the federal government of Canada has banned zero down mortgages, so technically you can no longer apply for a mortgage unless you do have a down payment. The minimum down payment required is 5% so that the mortgage you’re obtaining is a maximum of 95%, and if you’re applying for a mortgage with anything less than a 20% down payment you have to buy mortgage insurance.
Mortgage insurance is something you have to have, there is no getting around it if your down payment is less than 20%. It’s an annoying insurance to have to pay, like many are, because it’s quite expensive and has to be paid all upfront. The even more annoying thing is that you’re paying for your lender to be covered, not you! Mortgage insurance protects your lender from losing money should you stop paying your mortgage, it doesn’t protect you from missing payments.
Zero Down Mortgages Still Available
Despite the banning of no down payment mortgages there are actually still a couple of ways that you can get a zero down mortgage in Canada.
A couple of lenders are still offering 100% mortgages and presumably the only way they can do this is by having the borrower pay the lender a mortgage insurance directly. Only people who qualify will be able to do this, and requirements include a very good credit rating and a steady job.
Another way is to borrow your down payment so that you are technically complying with the zero down mortgage rule by putting down 5%, but you have borrowed the money from family or even got a cash advance on a credit card.
If you’re taking advantage of a cash back mortgage you can then use the cash to pay back the credit card or family members who lent you the money, though technically this whole process is breaking the rules and should be done at your own risk.
Rules to Protect Everyone
The rules applied by the federal government were put in place to protect consumers, lenders and the housing market in general. The Canadian government didn’t want to see a repeat of what happened in the US, and so zero down mortgages were banned. Some would argue that this is developing a nanny state, but since the rules were implemented in 2008 the housing market in Canada has been really quite steady, so it can’t be all bad!