December 8, 2008, 6:00 am

Cash Down For A Mortgage: The Financed Cash Down – How To Avoid CMCH Insurance Premium

by: The Financial Blogger    Category: Banks and You
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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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As a mortgage broker, I have to object to this plan a little.

The nuts and bolts of the plan will work, assuming the debt ratios work. (as you mentioned) As well, I like how you’ve outlined the dangers of borrowing the down payment.

Here’s the problem with your post. The fact is, the lender doesn’t give two craps how long you’ve had the down payment in a money market account. The fact remains, it was borrowed and will be treated that way. It’ll be treated the same as if you borrowed it 5 minutes ago. The only way that it won’t be is if you don’t disclose it (which is mortgage fraud and totally not recommended)

Your response to this is going to be that because of having “cash” down, your banker won’t ask any questions, and you’ll be good to go. This is wrong. Your banker would want to know what exactly you’re using the LoC for. And the fact still remains, they don’t care if it’s borrowed.

I don’t want to kill the plan totally. Borrowing the down payment is a perfectly legitimate option and as long as your credit is good and the income ratios still work, you can still very easily finance your down payment. There’s just no need to pay interest on it for 3 months.

I think that, generally, people shouldn’t finance their down payments. If you’re a young professional who doesn’t have any savings, maybe you should take a little time to get your financial act together. There’s a reason why the zero down mortgage products were eliminated.

Plus, you missed a wayyyyyy better option for most first time buyers. Rather than getting a line of credit, they should just hit up their parents for the loan. Chances are, they’ll get a much better interest rate (on mom and dad’s loan), mom and dad are going to be more understanding if junior is a little short every now and again and they can get their parents to sign a gift letter, meaning that the payments on the parental loan won’t be counted towards debt ratios.

Yeah, I realize that technically, not disclosing the parental loan is mortgage fraud too. Lenders know the game, and they’re okay with it.

So in summary, financing the down payment is ok. There’s no need to try to hide it.

by: The Financial Blogger | December 12th, 2008 (6:57 am)

Thank you for your additional points.

I actually don’t recommend to use credit to create your cash down. If you can’t save money, you should not even think about buying a house (it’s only looking for trouble).

With current mortgage conditions, I know that banks won’t be too hot about a client who borrowed his cash down. By doing this little trick, most bankers won’t make the link between the line of credit and the money market fund 😉