Yesterday, I wrote about how to get sufficient cash down to buy your property with an RRSP loan. Today, we are going to look at a more tricky way to literally create cash down for your mortgage. While the RRSP loan switchback is not too risky, the financed cash down is way more disputable. In the end, it’s like having a 100% financed mortgage. Wondering why the Canadian government took out this mortgage solution? Because if you can’t accumulate cash down for your mortgage, how the hell will you be able to pay off your mortgage payment if you need to repair your roof?
The Financed Cash Down Technique
Then again, this cash down creation technique is quite simple: you take a line of credit of 10K,15K,20K (as you wish and as you qualify for 😉 ) and invest your money in a money market fund. I would not play with this cash since the purpose is known and is over a really short investment period.
Wait 3 months and then go see your banker for a mortgage. He will ask you for proof of cash down and this is where you will provide him with 3 months of money market statements. He should not ask any questions and process the mortgage application.
Please note that in order to use the financed cash down technique, you still have to qualify for a line of credit and then, qualify for a mortgage with the line of credit payment in your Total Debt Servicing Ratio (TDSR).
This technique is applicable to young couples with high income (young professional) who didn’t have time to accumulate cash down but have plenty of cash flow to reimburse their debts (line of credit and the new mortgage).
The advantages of the financed cash down technique
– You get your property faster
– You avoid CMHC insurance premium (can go as high as 3% if you finance 95% of your property).
– Provides more flexibility in regards to payment (you always have the option of paying down your line of credit faster without penalties… after all, it’s part of your mortgage!)
The disadvantages of the financed cash down technique
– Indebtedness level increase significantly
– Used of almost 100% of potential credit available
– Will affect your credit score (maxed out revolving credit)
– No emergency fund option over the first year (you should build one of pay a part of your line of credit as fast as possible)
As you can see, while you are saving money on premium and potential increase in housing prices, you will have several risks related to this technique. You better make sure to have a solid and well balanced budget with free cash flow before considering this method. However, this could be of a great help of you already accumulated 10% of cash down and you want to get up to 20% and avoid the CMHC insurance premium!
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