New Rules for Borrowing Down Payments

Don’t fuss that CMHC (Canada Mortgage and Housing Corporation) no longer accepts borrowed money for a mortgage down payment. Plenty of lenders, including mortgage insurers, still do. You can get your foot in the door after all. 

How High-Ratio Insured Mortgages Work

Mortgage life insurance protects a lender if you default on your payments. Home buyers with less than 20% down can get high-ratio insured mortgages from CMHC, Genworth Canada or Canada Guaranty. You pay for the privilege. For example, CMHC tacks on a one-time insurance premium of:

  • 4% of mortgage amounts with 5% down
  • 3.10% with up to 10% down
  • 2.8% for up to 15% down
  • or 2.4% for 20% down.

A $500,000 mortgage with 5% down costs $20,000 plus PST. You pay PST and the premium at closing time or add the premium to your mortgage principal. (Tip: Keep interest costs down by making a $20,000 lump sum payment on your mortgage. The quicker you pay the premium, the less interest it costs.)

CMHC Lending Rules Changed July 1

Borrowed down payments used to be fine. But that changed July 1 after COVID-19 scared Canadian home prices downward by up to 18%. With the federal housing agency tense more borrowers will default, it’s a blow for millennial hopefuls and new home buyers.   

Higher Credit Scores, Lower Debt Required

Buyers with the least amount of cash are now required by CMHC to have a minimum credit score of 680 (up from 600). Gross debts (GDS) cannot exceed 35% of annual income, a downer from the previously generous 39%. Total debts (TDS) must be no more than 42%, compared to 44% in past.

How CMHC Mortgage Changes Affect GTA Homebuyers

The stringent new debt caps make a difference in how much the least affluent home buyers can afford. James Laird of (CBC, June 5, 2020) estimates Ontario home buyers with $100,000 in combined family income and 10% down can pick up a $462,860 home. That’s enough to get a condo in Brampton or Durham Region or a starter home in Cambridge. But hardly encouraging news compared to pre-July 1, when the same income would have bought a $524,980 property. 

Can You Borrow From Immediate Family?

On the upside, you can still get a mortgage with borrowed money, just not from CMHC and with more restrictions. Genworth Canada still accepts borrowed money for high-ratio mortgages, but has pulled the plug on repayable loans from immediate family members. 

No Gifts Allowed 

The list of family you can’t accept loans from at Genworth includes:

  • Parents or grandparents
  • Brothers or sisters
  • Legal guardians
  • Children or legal dependents

Mortgage Insurance with a Borrowed Down Payment

Genworth takes borrowed money for mortgages of up to $500,000 as long as it came from:

  • aunts, uncles or cousins
  • friends
  • a personal loan
  • credit line
  • or credit card.

You can put a co-borrower on the property title, even if they don’t live with you, but not a guarantor. Bonus: Genworth has lower minimum credit scores (just 650) and higher debt service ratios (39% and 44% as before). Insurance premiums are costlier (4.5% to 6.6%), but you get what you pay for in this real estate market. 

9 Tips for Meeting Mortgage Loan Insurance Requirements

Improve your chances of getting a high-ratio mortgage.

  1. Calculate if you can realistically make mortgage payments after other debts.
  2. Check your total household costs — mortgage, property taxes, strata fees and heat — meet debt servicing ratios (at least 39% and 44%).  
  3. Can you afford both the loan for a borrowed down payment and the mortgage?
  4. Use a traditional lender like a bank or credit union if your credit score is great.
  5. Go to a mortgage broker if you need help.
  6. Bring three months of pay stubs and your last tax assessment.
  7. For temp work or casual hours, show at least two years of income.
  8. Look for a home worth four times or less than your taxable income (line 26000 on your tax form).
  9. Unless you have 15% down, keep purchases under $500,000.

Use Your RRSP to Make a Down Payment

Don’t overlook unlocking the power of your RRSP. Couples can use up to $70,000 to buy a first home and singles up to $35,000, without any interest penalties, under the federal Home Buyer’s Plan. Buy or build a home for yourself or a family member with a disability. As long as you repay the RRSP within 15 years, no interest penalty is charged. Best tip yet, courtesy of the Royal Bank: put your savings in a RRSP at year end, then withdraw your down payment 90 days later. Use the tax refund for legal fees.

We Finalize Legal Documents to Refinance a Mortgage

Axess Law Ontario offers flat rate legal fees when you need a real estate lawyer for a mortgage refinance. We make video calls at your convenience, 7 days a week, anywhere in Ontario. Make an appointment by calling free to 1-877-552-9377 or 647-479-0118 in Toronto or using our online booking form. Lawyers are available to meet in person at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices. 
Click here to learn more about Axess Law’s real estate law services.

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