Mortgage down payments are no joke in Canada. Home prices are hitting their ceilings in many areas, and the federal government has just imposed shorter amortization periods for homebuyers who don’t have the full 20 per cent. So then, it may come as no surprise that the biggest lender of zero-down mortgages in Canada has pulled this product from their mortgage offering shelves.
It was late last week when Scotiabank announced that they were pulling their zero-down mortgage. This mortgage allowed a homebuyer to purchase a property with as little as a 5 per cent down payment. So far, this is something that any homebuyer can do still today, at almost any lender. But with a zero-down mortgage, you don’t actually need to have a 5 per cent down payment. Instead, you can take out two loans at the time you take out your mortgage. One loan will be to cover the purchase of the home, and this will be amortized over 25 years (if you only have a 5 per cent down payment.) The second loan will be the loan for the down payment; and you will typically have 5 years to pay this loan back.
Scotiabank was one of the few lenders in Canada that offered these loans, but they were the biggest. There are currently two others offering zero-down mortgages, but it remains to be seen how long these lenders will continue offering these products. Especially in today’s environment when the government is trying to stem consumer borrowing as much as possible.
Zero down mortgages were first brought to the market in order to help homebuyers who had impeccable credit but were having trouble saving for a down payment. However, they also have a lot of drawbacks, which is most likely why Scotia has pulled them.
Because these mortgages have less than the required 20 per cent down, the homeowner will also need to take out mortgage insurance. And on zero down mortgages, these fees are typically higher than they are with other mortgages. The interest attached to the mortgage principal is also often higher on zero-down mortgages.
Another large drawback that often comes with zero down mortgages is that you typically can’t refinance or renew for usually at least 2 years with this kind of mortgage. This is because you won’t have the equity built up in the property (down payments provide a significant amount of equity) and so, you won’t have any bargaining power should you want to change your mortgage.
Also, because you won’t have any equity right away coming in the form of a down payment, the risk to the lender increases significantly. It’s usually this down payment that the lender can fall back on to collect should you default on the mortgage loan. Without it though, the lender only has mortgage insurance to protect them. Because of this, qualification criteria for zero down mortgages are extremely strict, with only a small percentage of the population being eligible for them.
Scotiabank isn’t the first lender to pull zero-down mortgages from the products they offer. And, with down payments becoming such a serious issue across Canada, they probably won’t be the last either!
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