Some bank of­fers should be re­fused

Lenders’ cash back mort­gage deals come with steep costs

Calgary Herald - Calgary Herald New Condos - - New Condos - GARRY MARR

It’s the last refuge of those who don’t have money, but who still want to own a home.

The banks have long used the of­fer of giv­ing cash back as a lure to at­tract cus­tomers, many of whom can’t come up with the min­i­mum five per cent down pay­ment de­manded un­der govern­ment-backed mort­gage in­sur­ance rules.

The deal is sim­ple. The bank gives you cash up front to use how­ever you want, ex­cept as a down pay­ment.

The price of the up­front cash is a much higher in­ter­est rate — usu­ally the posted rate, which is al­most two per­cent­age points higher than you might get ne­go­ti­at­ing.

It’s a costly move when con­sid­ered over the life of a five-year mort­gage. My bank says you can get $20,000 up front on a $400,000 mort­gage, based on a five per cent cash­back mort­gage. Based on monthly pay­ments at the cur­rent posted rate of 4.99 per cent, that mort­gage will cost you $93,422.91 in in­ter­est over five years. The same mort­gage will cost you $55,288,48 in in­ter­est at 2.99 per cent — the go­ing rate in the dis­count mar­ket.

You are pay­ing al­most $40,000 more in in­ter­est — the dif­fer­ence be­tween the posted and dis­count rate — to get $20,000 to­day. Even when you con­sider the money is in pre­sen­tvalue dol­lars, it’s pretty clear why this type of of­fer is not a great deal for the con­sumer and is be­ing dis­cour­aged. You’re not sup­posed to use it for a down pay­ment, but it finds its way there any­way, ac­cord­ing to many people in the in­dus­try.

This past week the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions re­it­er­ated it doesn’t like the prac­tice at all, rec­om­mend­ing mort­gagede­fault in­sur­ers not un­der­write loans that use cash back for a down pay­ment.

Draft guide­lines on res­i­den­tial mort­gage in­sur­ance un­der­writ­ing prac­tices is­sued by OSFI in­cluded a sec­tion on down pay­ment.

“In­cen­tive and re­bate pay­ments (i.e. cash back) should not be con­sid­ered part of the down pay­ment,” said the reg­u­la­tor.

In cases in which people don’t use their own eq­uity and opt for non-tra­di­tional sources as a down pay­ment, the reg­u­la­tor seems to want fed­er­ally reg­u­lated mort­gage in­sur­ers to con­sider that a risk and charge larger pre­mi­ums.

Led by Canada Mort­gage and Hous­ing Corp., the crown cor­po­ra­tion that has the largest po­si­tion in the mar­ket, all mort­gage-de­fault in­sur­ers will be rais­ing their pre­mi­ums May 1.

Even though you sup­pos­edly need to have five per cent down, you are al­lowed to add the cost of the mort­gage in­sur­ance pre­mium to your loan. Pre­mi­ums are as high as 3.15 per cent for a mort­gage with five per cent down, but, not to worry, you can still add that to your loan, which will take you to 98.15 per cent of the value of your home.

“I think you want to have some sav­ings mech­a­nism in place to make sure you have some sort of down pay­ment,” says Calum Ross, a Toronto-based mort­gage bro­ker, who is not a sup­porter of cash­back mort­gages. “I think it’s a fun­da­men­tal risk to the sys­tem if you don’t have any skin in the game.”

Rob McLis­ter, edi­tor of Cana­dian Mort­gage Trends, says there’s not much banks or in­sur­ers can do if con­sumers are com­ing up with their five per cent through other means, such as bor­row­ing from fam­ily or putting it on a credit card.

“Lenders have been giv­ing cash back, it’s kind of a loop­hole to the 100 per cent fi­nanc­ing rule pro­hi­bi­tion,” McLis­ter says, re­fer­ring to a pre­vi­ous rule change that de­manded the min­i­mum five per cent down.

“But you can still get that down pay­ment by bor­row­ing at 18 per cent on your credit card, if you want to.”

McLis­ter says credit unions, which have been al­lowed to do 100 per cent fi­nanc­ings be­cause they are not fed­er­ally reg­u­lated, will no longer be able to pro­vide those loans if they are to be cov­ered by govern­ment-backed mort­gage in­sur­ance.

Ben­jamin Tal, deputy chief econ­o­mist with CIBC, says some people will al­ways find a way around rules.

“You can get a loan from a par­ent and call it a down pay­ment (and then pay it back). You can never un­der­es­ti­mate the cre­ativ­ity of people,” says Tal.

Richard Buchan/The Cana­dian Press

Con­sumers should re­sist the lure of cash up front from lenders when tak­ing out a mort­gage. It’s bet­ter to take the long view and save for a down pay­ment.

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