The wonderful world of Mortgage Penalty Calculations. Or Why you should not be Thrilled a bank will match your Broker’s Rate.

General Mark Goode 1 Apr

Why you should not be Thrilled that a bank will match your Mortgage Broker’s rate…

In short, the penalty. The penalty to pay out your mortgage early will be calculated including charging you all the money you ‘saved’ from the rate discount. ~

 

Why Does Higher Posted Rate and More Discount Trigger Higher Penalty?

To many homebuyers and real estate practitioners alike, calculating your mortgage penalty, or called “bonus interest”, in breaking a fixed rate mortgage before maturity is a mystery. Believe it or not, many bank account managers don’t know the basis of penalty calculation. She will input your sale closing date in the system, print out an estimated penalty statement, but she will emphasize that it is “For Indication Only” and even highlight these 3 words with a yellow highlighter to protect herself/bank.

Penalty for variable rate closed term is easy: 3 months interest only.
If you break a variable rate closed term of $500,000 and your net rate is 3%, then your penalty is about $500,000 x 3% x 3/12, approximately $3,750. But there is a subtle issue if you never exercise this year 10% or 15% or 20% bank’s allowed maximum annual prepayment. Technically you can agrue that you pay the 10%/15%/20% one minute before you break the mortgage. Some banks automatically give it to you, some banks may not. But 10 out of 10 home sellers don’t know the subtle situation.

Penatly for fixed rate closed term is complex: Greater of 3 months interest (per above) and IRD Interest Rate Differential. What is IRD?
E.g. If you purchased a house on 4/22/2011 for $685,000, and you locked a 5 year fixed rate when the posted rate was 5.49% and you received a discount of 1.79% from your bank, or contract rate of 3.70% for maturity on 4/21/2016. If you sell your house and close it on 3/22/2013 when the outstanding principal balance is $500,000, then the bank will use today’s 3-year posted rate minus the original discount you received, and compare the calculated net rate with your contract rate, and multiple it with the no. of months from now till maturity, and the outstanding principal.
Is it still too complicated?

A) 3 months interest = $500,000 x 3.70% x 3 / 12 = $4,625.
B) IRD
(1) use today’s 3-year posted rate (3.55

 

%) minus 1.79% the original discount you received on 4/22/2011 = 1.76% calculated net rate
(2) compare your contract rate with the calculated net rate. If the latter is greater than your contract rate, then there is no IRD. But in this case, 3.70% minus 1.76%, the IRD is 1.94%. Your bank suffers 1.94% for 37 months because of your early termination today.
(3) calculate IRD penalty: $500,000 x 1.94% x 37 months / 12 months = $29,908.
I did one refinance from another bank 3 years ago and the client was charged with $30,500 penalty, very similar scenario.

Hence, don’t be happy if you get 2.89% today, because you have received a discount of 2.25%. If you sell your house 2 to 3 years later, you may port the outstanding mortgage to the new mortgage (if you buy again within a gap of 3 months, and if you are qualified again). But you should be prepared to pay a huge penalty. Of course if the rate rises by 2%, 3%, then there will be no IRD. But bear in mind the short term (1 to 3 years) posted rates are usually 1.50% to 2% lower than the 5-year rate. Check with your friends/clients, 1 out 3 or 4 clients who signed up a 5-year mortgage ends up paying penalty.
This accounts partially why Canadian banks do not want to lower the 5 year posted rate by 1% but offer you 2.25% discount. There are further implications… [To Be Continued]

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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Article may have been altered or edited from Original Post LinkedIn.
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Thank you all for voting us Readers’ Choice Mortgage Company of the Year again!

General Mark Goode 1 Apr

Thank you all for voting us Readers’ Choice Mortgage Company of the Year again!

We are happy to help you and are thrilled by your confidence in choosing Mortgage Man – Dominion Lending Centres
for your home financing. We are honoured and promise to continue to provide the same reliable informative and solid
mortgage advice and services you have grown to trust.

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Posted: Corin Payie MMDLC
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Pre – Pre – Approval Quick Tip

General Mark Goode 28 Mar

 When entering into the loan process, it’s not in your best interest to go out on a shopping spree. No new car, new appliances, all of these very tempting ‘extras’ should be saved for after you have secured your mortgage and after you KNOW that you can afford them. You need to make sure you are not creating a negative impact on the score while the lender is reviewing it. Secondly, a Tri-Merge Credit Report. This combines the scores provided by (1)Fair-Issiac (FICO), with the score generated by (2)Trans Union (Empirica) and the Beacon Score produced by (3)Equifax. We are providing the lender with the rounded profile because these three scoring systems can vary in their results. The lender is going to look at the middle score and throw out the other two. This is, in many cases, a benefit to you.

Mortgage Man – Dominion Lending Centres | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca

Original Article credit to: Tim Braheem President, First Rate Financial Group, Westlake Virginia, Calif., 818/707-4131, E-mail: timb@firstratefinancialgp.com

Article may have been edited for content. Corin Payie MMDLC

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The Five Factors

General Mark Goode 28 Mar

What the credit scoring model seeks to quantify is how likely [you,] the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future.

Credit scores can range between a low score of 300 and a high of 850. The higher the [your] score is, the less likely they are to default on a loan. Only a very rare 1/1,300 people in the United States has a credit score of above 800. These are the people who walk away with the best interest rates. On the other hand, 1/8 prospective home buyers are faced with the scenario that they may not qualify for the loan they want because they have a lower score, between 500 and 600.

This score comprises five factors.
I will list these in order of importance, just as your underwriter will look at the score:

Payment History: 35 percent impact. Paying debt on time and in full has a positive impact. Late payment, judgments and charge offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment.

Outstanding Credit Balances: 30 percent impact: The ratio marking the difference between the outstanding balance and the available credit is important here. Ideally, the client should keep their balance below 10 percent of the available credit limit. Ideally, the client should keep their Balance of the body of the available credit limit.  

Credit history 15% impact: This marks the length of time since a particular credit line was established borrower is stronger in this area.

Type of credit 10% Impact: a mix of loans Credit cards and mortgages more positive than a concentration of debt from credit cards only.

Inquiries 10% of impact: This quantifies the numbers of inquiries that have been made on a consumer ’s credit history within a six-month period. Each hard inquiry can cost from two to 50 points on a credit score but the maximum number of inquiries that willreduce the score is 10. Eleven or more inquiries in a six-month period will have no further impact on the borrower’s credit score.

Mortgage Man – Dominion Lending Centres | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca

Article credit to: Tim Braheem President, First Rate Financial Group, Westlake Virginia, Calif., 818/707-4131, E-mail: timb@firstratefinancialgp.com All credits and copyrights to their respective owners on reposted articles. ~ Article may have been altered or edited from original. Corin Payie MMDLC

 

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Canada Student Loan Bankruptcy Legislation

General Mark Goode 21 Mar

Hardship Provisions and Student Loans in Consumer Proposals

I have written extensively on the hardship provisions in the Bankruptcy & Insolvency Act, including What Constitutes Hardship with a Student Loan after Bankruptcy in Canada? and Good Faith, Hardship and Student Loan Discharges in Bankruptcy.  In summary, under section 178(1.1) of the Act:

(1.1) At any time after five years after a bankrupt who has a debt referred to in paragraph (1)(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that

  • () the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; anda
  • (b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.

In simple English: a student loan is automatically discharged in a bankruptcy if, at the date of bankruptcy, more than seven years has elapsed since the bankruptcy ceased to be a student.  Under the hardship provision, after five years you can apply to court to have the student loan discharged, provided you can demonstrate hardship (see the articles referenced above for more details).

What happens if you file a consumer proposal instead of a bankruptcy and you have student loans?  The same seven year rule applies, so a student loan is automatically discharged if you have been out of school for seven years when you file your proposal, and you complete your proposal.

But what about the hardship provision? Can you ask for forgiveness under the hardship rule after five years if you file a consumer proposal?  Up until this month, the answer was “no”.

In October 2012 a Toronto bankruptcy court judge ruled (and I’m simplifying here) that since the Act refers to a bankruptcy, it does not apply to someone who files a consumer proposal.  That is certainly the plain meaning of the Act, and presumably if Parliament had wanted the section to apply in both bankruptcies and proposals, that’s what they would have said.

However, in the case of Re Cardwell, 2006 SKQB 164, Registrar Herauf stated that, logically, the sections should apply in both bankruptcies and proposals, since not allowing this section to apply to proposals discourages people from filing consumer proposals.

So, on appeal, Mr. Justice H. J. Wilton-Siegel of the Superior Court of Justice – Ontario ruled on March 15, 2013 that the hardship provisions apply in a consumer proposal and in a bankruptcy (the case citation is Eric Joseph Sitler (Re): 2013 ONSC 1576.

What does this mean, in plain English?  Simply put, if you file a consumer proposal when you have ceased to be a student for more than five years but less than seven years, although the student loans are not automatically discharged, you can apply to court to get relief from your student loans, just as if you had filed bankruptcy.

Sound complicated?  It is, so contact a consumer proposal administrator to request a no charge initial consultation to review your options and determine which option is best for dealing with your student loans.

 

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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Article may have been altered or edited from Original Post LinkedIn.
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Reposted All credits and rights to their respective owners Original post @  http://student-loan-bankruptcy.ca/2013/03/hardship-student-loan-consumer-proposal.htm?goback=.gde_4061544_member_223900776

~Article may have been edited from original. Corin Payie MMDLC Scotchmints.com

Dragons’ Den Hosts Fight over Deal that Could Be Most Lucrative in Show History

General Mark Goode 19 Feb

Dragons’ Den Hosts Fight over Deal that Could Be Most Lucrative in Show History

enRICHed Academy

It doesn’t happen often, but tonight on CBC’s Dragons’ Den, all five venture capitalists were fighting over one product that has a market potential of 50 million people in North America and projected revenues of $150 million. The product: enRICHed Academy, which teaches young adults how to earn, save and invest their money.

“We should have known a product involving money would interest Kevin O’Leary,” said Kevin Cochran, co-founder of the enRICHed Academy, who faced the Dragons’ in tonight’s episode. “While our eventual goal is to increase sales in the Canadian and US market, the real reason we created the program was to stop young people from making financial mistakes, like the ones I made.”

Drawing from their own financial experience, Cochran and co-founder Jay Seabrook created enRICHed Academy, a DVD-based program teaching young adults how to get rich and avoid debt.

On tonight’s episode of Dragons’ Den, Kevin O’Leary offered Cochran and Seabrook an intriguing package, consisting of his endorsement and a 10 per cent share in the company. With Lavalife co-founder Bruce Croxon also interested, it was eventually a joint venture involving Wealthy Barber David Chilton, Boston Pizza’s Jim Treliving and marketing guru Arlene Dickenson that appealed to the enRICHed Academy founders.

All five Dragons’ were interested in the enRICHed Academy program because the education and training industry is a multi-billion dollar industry in North America. The earning power of P90X, Tony Robbins and other now infamous training programs have paved the way for the Dragons’ to realize this has the potential to be a huge moneymaker.

 

Mark Goode AMP is bringing enRICHed Academy to Orillia!

Keep your eyes on our facebook for updates on how you can be part of this great financial revolution!

 

For more on CBC’S Dragons’ Den click here. Potential Revenue Could Exceed $150-Million  TORONTO, ONTARIO–(Marketwire – Feb. 17, 2013) – *Editors: great speaker (available for interviews and call-in shows)

Original Post and all pertinant credits.

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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Policing Banks… the world of Mortgages

General Mark Goode 13 Feb

Banks operate under the scrutiny of government watchdogs. But when it comes to mortgages, those watchdogs don’t watch everything they could.

“Individual (bank) mortgage reps operate outside of regulatory boundaries which commonly govern licensed professionals,” says Samantha Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission and chief executive officer of the Mortgage Brokers Association of British Columbia. Rules pertaining to mortgage rep competency, the suitability of mortgage recommendations and compensation disclosure are largely left to the banks themselves.

That raises certain questions, like the procedure banks use when sending a mortgage applicant to another lender.

At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close.

Some might easily mistake this practice for “dealing in mortgages,” an activity that normally requires a brokering license. But, because bank employees are the ones recommending the alternative lenders, and because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a licence.

Consumer protections differ in bank and broker circles. In Ontario, for example, provincial penalties apply whenever a broker:

  • – Ontario requires brokers to “take reasonable steps” to ensure that any mortgage presented to a borrower is . Not only must the borrower be properly qualified, but recommendations should attempt to minimize the borrower’s current and future borrowing costs and provide the right mortgage flexibility given the customer’s needs. By contrast, while bank regulations encourage banks to “Know Your Client,” they don’t contain specific guidelines on ensuring suitability – apart from confirming the borrower is properly qualified.Suggests an unsuitable lender or mortgagesuitable
  • Sells a higher mortgage rate to get paid more – Brokers must disclose this conflict of interest. Federal disclosure rules don’t hold banks to the same standard, even though many bank reps – like many brokers – get paid sales incentives and earn more for selling a higher interest rate.

Policing these things falls in the lap of provincial regulators. Provinces draft specific broker conduct rules, pro-actively monitor and audit brokers and sanction individual brokers publicly when they’re caught violating regulations.

With bank mortgage reps, there is no independent government watchdog that directly sets specific suitability and compensation disclosure rules, audits and monitors individual reps, and publicizes it when a bank rep breaks the rules. The banks themselves are responsible for “developing the policies and procedures to be followed” by their mortgage reps, says Rachel Swiednicki of the Canadian Bankers Association (CBA).

Many assume the Office of the Superintendent of Financial Institutions (OSFI), the primary bank regulator, supervises bank rep conduct. In fact, OSFI’s main role is to “monitor and examine institutions for solvency, liquidity, safety and soundness,” says a spokesperson. “OSFI does not have the authority to intervene in the day-to-day operations of the institutions it regulates for individual consumer-protection purposes.”

That’s actually the job of the Financial Consumer Agency of Canada (FCAC). It is tasked with ensuring that bankers comply with federal consumer protection rules.

FCAC is a fantastic mortgage educator and regulator when it comes to high-profile problems like mortgage penalty disclosure or failure to provide cost of credit disclosure. But “FCAC appears to regulate systemic institutional compliance problems only,” says Ms. Gale.

Julie Hauser, FCAC’s spokesperson, explains that “FCAC supervises federally regulated financial institutions, not individual employees.” Unlike provincial broker regulators, FCAC generally does not:

· Have its own set of rules, prohibitions and competency requirements to promote suitable mortgage recommendations (e.g., federal rules don’t deal with specifics about what constitutes a suitable alternative lender for a declined borrower, or when a secured line of credit, 1-year term or fully-closed mortgage are appropriate for a borrower)

· Impose specific educational standards and licensing for bank reps

· Pro-actively audit or monitor individual bank mortgage rep conduct

· Post online when a bank rep wrongs a mortgage customer (like this.)

That means it’s up to a bank to set and enforce its own specific competency, suitability and market conduct policies within general federal guidelines. In many ways, this makes banks their own overseer.

So, why aren’t the feds watching mortgage rep activity more closely? Apparently it’s a low priority issue for Ottawa. “We need the political will of regulators to get together and sort this problem out,” Ms. Gale adds. “There is real risk here for consumers.”

Ms. Gale says that mortgage brokers have a fiduciary-like relationship with customers – to recommend a suitable lender with suitable terms. But with banks, a similar fiduciary relationship doesn’t exist because they primarily push their own brand.

“Banks are kind of like a mortgage shop,” she says. “And when they pass you off to another lender, and you don’t know who you’re dealing with and why, that’s a consumer risk.” (Banks always get a customer’s consent to work with another lender, but a bank’s true reasons for choosing another lender are not always disclosed.)

Some banks refer customers that they can’t service to lenders or brokerages that the bank has a monetary interest with. “They’re not necessarily working for you to get you the best deal,” Ms. Gale says.

Rodney Mendes, a broker and former TD Canada Trust mortgage specialist of 15 years, says banks’ internal guidelines are “just as stringent” as provincial broker regulators.’ RBC, for example, states it has a “strict code of conduct,” “comprehensive training” and “pro-active monitoring and auditing practices for its entire mortgage business.”

That’s all good, but bank mortgage reps “don’t report to any governmental authority unless there is a complaint,” Mr. Mendes says. “Bank mortgage specialists report to their own internal compliance department” so it’s often up to management to discipline a mortgage rep. And, in a small number of cases, it’s possible that management “may not want to lose volume on their books” by coming down too hard on a big producer.

Banks have a “strong culture of compliance,” counters the CBA’s Maura Drew-Lytle. Banks make mortgage specialists attest to their compliance obligations and subject them to annual training and testing. Mortgage reps can also be fired, which is less of a threat for mortgage brokers. Ms. Drew-Lytle also notes that banks address most consumer complaints internally, using well-established complaint processes with a third-party ombudsman as an arbiter.

All of that is true. But when it comes specifically to suitability and compensation conflicts, the goal should be to fully disclose and avoid them, not address them when there’s a complaint.

As a side note, not all mortgage brokers have clean hands just because they’re monitored more directly by provincial regulators. Like the large majority of bankers, most brokers are honourable professionals who care about their clients. Yet, as a broker, I regularly witness biases, conflicts and competency issues in our industry. I’ll reveal examples in my next column.

That said, the takeaway here is that Canadians are forced to rely heavily on banks to police their own mortgage sales forces. There is no impartial government watchdog pro-actively targeting bank reps who make unsuitable mortgage recommendations or fail to disclose compensation-related conflicts. With more direction and better funding, the FCAC could assume that role.

 

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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Robert McLister *This has been reposted from Original Post   

The Rates are Way Back Down….

General Mark Goode 22 Jan

Well that was an attempt to play on ‘the boys are back in town’
my whistful wish for summer days.
Though the heat in here is all because of these HOT HOT rates on offer.

I’ve put Mark’s rate sheet up here for you all to check out!
Remember that we can hold rates for up to 120 days.
Feel free to give us a call or come on in and we can go over what would work best for you

Great rates are something but the term that dictate them are another thing to consider when seeking financing for

your home…

RateSheet_JAN.pdf

 

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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Canadian seniors with massive personal debt a trend that will continue

General Mark Goode 15 Jan

Daniel and Sarah of Abbotsford reached the end of their financial rope in 2011 when Canada Revenue Agency abruptly froze their accounts for unpaid taxes.

Their personal debt had climbed to about $50,000. Daniel had suffered reversals in his small construction service business and the couple continued to spend more than they had.

Creditors were eager to continue extending them credit, assuring them finances would improve for them next year. They didn’t.

The couple — whose names have been changed for privacy — were deeply ashamed.

“You feel guilt and wonder ‘How did I let things get to this point?’” says Daniel, 61. “Eleven years ago, we were debt free.”

In desperation, they went to see a bankruptcy trustee. After considering the options, they decided to file for bankruptcy.

Daniel had just joined the ranks of B.C.’s grandpa debtors.

People over the age of 55 are the most rapidly growing group of debtors in B.C., according to bankruptcy trustee Sands & Associates.

And New Year, when bills for Christmas spending come due, is when their ranks grow the fastest.

“From mid to late January we’ll start to see a big ramp-up of people getting their bills and not knowing what to do,” Sands senior vice-president Blair Mantin says.

“You almost know based when the credit card bills have arrived after Christmas based on the call volumes we see.”

The number of seniors coming through the doors of Sands’ Lower Mainland offices has soared in recent years.

The number of debtors aged 65 and older whom Sands has helped file bankruptcy or make consumer proposals jumped 217 per cent from 2009 to 2011. These numbers rose 193 per cent for those age 60 and up, and 166 per cent for people 50 and over.

Mantin predicts the numbers of grandpa debtors will continue to climb as seniors struggle with misfortune or spend their way into debt in retirement.

“There is nothing I’ve seen that would give me an idea this trend is going to stop,” he says.

“It was pretty rare for me to see people aged 75-plus but in the last month, there have been five in that demographic.”

Some seniors go bust from helping children who have remained dependent long into adulthood, Mantin says.

Others are forced to declare bankruptcy after unnecessarily paying off the debts of family members who die, Mantin says.

Seniors, unlike other age groups, don’t try to “game the system” or commit fraud when they come to see Sands, he says.

They may also suffer the most from physical effects of financial stress.

“If you’re already weakened because of some of the medical conditions associated with growing older — strokes or heart disease or hyper-tension — money stress may be something your health can’t withstand.”

pluke@theprovince.com

 

Mortgage Man – Dominion Lending Centres | Ph: 705-326-8523 | Fx: 705-326-8645 |  www.markgoode.ca | FSCO# 12254 | 180 Memorial Avenue | Orillia, ON L3V 5X6 |
    
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You can BUY A HOUSE without saving your pennies ?

General Mark Goode 15 Jan

It would seem that regulators want to dissuade Canadians from buying homes with nothing down. Yet despite all of the recent changes, buyers can still get into the real estate market with little cash on hand.

Ottawa did away with Canada Mortgage and Housing Corp .-insured 100 per cent financing back in 2008. Home buyers with few savings searching for an alternative were left with cash-back down payment mortgages. (That’s where a lender gives you your 5 per cent required down payment, in exchange for a higher rate.) But those didn’t last long because in 2012, regulators barred banks from offering cash back for down payments.

Purchasing a home without your own down payment is often risky. One exception is when a borrower is well-qualified (apart from the down payment), has enough potential resources to withstand a loss of income and falling home prices, and is better off owning than renting. But exceptions are just that, and not the rule.

Young people use alternative down payment sources more often than most. Why? The main reason is a lack of savings. At a time when the average national home price has jumped to $356,687, the Canadian Association of Accredited Mortgage Professionals finds that more than one in four renters have less than $5,000 saved for a down payment. Yet, many of these folks are dead set on owning a home, so they end up using one of the down payment methods listed below.

Borrowing from other credit sources
When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Ottawa prohibits you from borrowing that 5 per cent from your mortgage lender if that lender is a bank or federal trust company.

Meanwhile, you’re free to borrow your down payment from a line of credit, personal loan or even a credit card. That’s right, if you’re creditworthy you can throw your down payment on a VISA at 20 per cent interest. Mind you, not all lenders allow this and the ones that do check that you can afford the extra debt payment.

One obvious problem with borrowing your down payment is the higher interest cost. Even if you use a line of credit, the interest rate on your down payment loan can be much higher than a regular mortgage, or have a riskier variable rate.

“Borrowing a down payment from less suitable sources is a potential issue,” acknowledges Gord McCallum, broker and president of First Foundation Inc. “Often times, with new mortgage regulations there can be unintended consequences that are worse than the problem they’re purported to solve, and this may be one of them.”

Getting a cash-back down payment mortgage
In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.

Not surprisingly, the interest rate on cash-back mortgages is well above a normal mortgage. But when you factor in the “free” cash, the overall borrowing cost isn’t that horrible. The main downside of a cash-back mortgage is that you have little equity cushion if home prices fall and you need to sell. And if you break the mortgage early, your lender can take back much or all of the cash it gave you.

Going forward, the days of cash-back down payment mortgages may be numbered. There is speculation that they’ll be eliminated in 2013–by either mortgage insurers, provincial regulators or both. For now, however, a handful of credit unions still offer them to people with strong credit, with Ontario-based Meridian Credit Union being the biggest such lender.

Using a gifted down payment
If you’re a young home buyer with a generous relative, you may be lucky enough to get your down payment as a gift. Most lenders will consider a gifted down payment if the donor is a parent, grandparent or sibling.

Unfortunately, while not an epidemic problem, it’s no secret that a small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money. That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.

RRSP Home Buyers Plan (HBP)
First-time buyers can borrow up to $25,000 from their RRSP as a down payment. But this is a very different kind of loan, for three reasons:

1. You’re borrowing from your own retirement savings, as opposed to a third party.

2. You don’t have to start repaying the loan until the second year after the year you make your withdrawal.

3. Even though Revenue Canada wants the funds paid back in 15 annual instalments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.

The RRSP HBP comes with other perils. By draining your retirement savings, you risk losing years of tax-deferred investment gains. That’s a decision that some will later regret.

Moreover, any instalments that aren’t paid back on time are taxed as income in that year. And as many as one-quarter of HBP participants have missed or underpaid their instalments in the past.

Special lender and government programs
Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down.

There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.

All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.

If you do use one of these down payment alternatives, remember these two things: Buying a home without your own cash is not a decision to take lightly. And qualifying for a mortgage doesn’t mean can successfully carry one.

Special to The Globe and Mail

Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage. You can also follow him on twitter at @CdnMortgageNews