I was at the CMHC (Canada Mortgage and Housing Corporation) the other day to see who they are and what they offer. Until that meeting I found completely ridiculous the idea of having 100% financing mortgages. I thought it was stupid to give people the ability to buy a property when they cannot afford the payments. What is ironic is that the CMHC is a Canadian Government organization and its main purpose is to help people buying a property.
But how can you help people when you are helping them to jump into a bottomless pit of debts?
This is what I asked them after a 20 minutes speech about how CMHC is a great organisation and bla bla bla… I was surprised to get a concise, clear and logical answer to my cynicism!
Please consider the following example:
You want to buy a property today that worth 200K. Unfortunately, you don’t have sufficient cash down (a minimum of 20% cash down is required in
Housing price history showed us that the market is going up by 4 to 5% per year on average. Let’s be optimistic and take only 4%. In 4 years from now, the house you want to buy will worth 234K. You will then need almost 47K cash down to buy it without the insurance. You are still 7K short.
However, if you decide to buy the property today at 200K with $0 cash down, the insurance premium will be 6,2K but you will get your house right away. In four years, your house will worth 234K so you would make a paper profit of 34K while you paid only 6,2K in premium to realize this gain. That’s a 448% yield over 4 years.
If you are able to put 10K aside (plus your existing rent), you are able to make some pretty good mortgage payments. Considering this example, I have no other choice but to understand that the 100% financing mortgage could be a good option for some individuals. However, before you go run at your bank to ask for this kind of loan, you must consider the following points:
– If you think that you are able to save 10K per year, how come did you not do it in the past?
– A property cost much more than only the mortgage payment; you have to think about heating, taxes, maintenance, decoration and tools you could need to take care of your property.
– You don’t need cash down to finance your property, but you still need some savings to buy your property. Lawyers, appraisers, movers don’t work for free and won’t finance your expenses. It is suggested to have between 1,5% to 3% of the value of the property for other expenses.
– Make your own calculation related to your specific situation. You may be able to save more money per year or buy a smaller house. Look at the market study for your area, the increase in this specific market might be lower.
– Consider other mix-financing before getting the 100% mortgage. You might be able to put some money aside, borrow money at a good rate from your parents or to take a loan or a line of credit to finance a part of your cash down. The more you offer as cash down, the lower the insurance premium will be.
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