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The Money Management Newsletter: Home Ownership
Is a "zero" down payment mortgage right for you?

With highly intense competition in today's mortgage marketplace, financial institutions are coming up with even more innovative ways to attract customers than they have in the past. We have been offered cash back on our mortgages and even points that will earn us free flights or merchandise. We have seen mortgages for the self-employed, assuring us of an easier application process.

The latest mortgage offering is the "zero" down payment mortgage which can be an ideal product for those consumers who have an excellent credit history, but have not yet saved up the required minimum down payment. This type of mortgage is now available because the Canada Mortgage and Housing Corporation no longer requires that a minimum five per cent down payment come from the consumer's own resources. As of March 1, 2004 the down payment can come from any source such as lender incentives and borrowed funds. Some financial institutions are offering homeowners either the 5% for the downpayment as cash back, which can only be applied towards the down payment, or allowing customers to borrow the 5% for the downpayment. In either situation, the consumer is virtually obtaining their mortgage without using any of their own resources. Sounds like a great opportunity, doesn't it? Well, there are a few drawbacks that people shopping for mortgages should consider.

This type of mortgage carries a higher insurance premium than a regular high-ratio mortgage (financing up to 95% of the property value), which is an added cost to you.

The qualification criteria is very strict. You must have a high credit score (680 beacon score) and an excellent credit history.

There is less variety to choose from. This type of mortgage is usually offered on a fixed-rate closed mortgage with a limited number of terms. In most cases, rate discounting or reward points programs are not offered.

The less money you put down on your home, the higher the carrying costs of your mortgage. However, if you are able to make a bigger down payment, you will not only lower your mortgage insurance premiums (default insurance is charged on mortgages with a downpayment of less than 25% of the property value), but the total cost to finance your home will be reduced.

How do you know if a "zero" down payment mortgage is right for you? The best way to find out is to schedule and appointment with your personal banker, investment advisor or local mortgage broker. Each can complete a financial needs assessment with you that can help identify the right mortgage for you.

For more information about mortgage options, check out the Mortgages section of our Learning Centre, or view our selection of Mortgage-related calculators in our Financial Tools section, which can be used to illustrate mortgage loans or to compute net worth to help you figure out the costs of owning and running a home.

With files from NC

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