Sky-high rent and living expenses in markets like Vancouver can make it challenging for some buyers to save up the standard down payment of 5 per cent or more (20 per cent or more if you have want to avoid paying for mortgage loan insurance).
However, some lenders offer a flex down payment option allowing buyers to secure a mortgage without saving up for a down payment themselves. The money could be borrowed from other sources such as a line of credit, equity on an existing home to buy an investment property or a vendor take-back (where the owner of the home lends some money to the purchaser if there is a shortfall in the mortgage).
Here’s what prospective buyers need to know about flex down programs:
- Not every lender offers flex down.I know about five lenders that offer flex down. One is a traditional national bank and the others are mono line lenders. Because flex down is not universally available, there will be less available lenders for the purchaser.
- You’ll need excellent credit and little to no debt.Flex down is a riskier product for lenders so it is only available to income-qualified, employed people with no blemishes on their credit. Lenders will also want assurance that the purchaser is unlikely to default. The ideal client qualifying for flex down would have established credit and at least two trade lines (two sources of funds that are available to them or two sources that can provide a payment history such as a credit card, line of credit, personal loan, car lease or phone/utilities bill). The purchaser should also try to keep the debt-to-income ratio low by not going for the most expensive home in their price range but rather something more appropriate to their current income and debt.
- You’ll pay more for mortgage insurance.Since flex down is a riskier loan than one with a traditional down payment, mortgage insurance premiums are higher than normal. The insurance premium difference would be 0.2 per cent higher on flex down, so with 5 per cent down, the insurance premium would go from 3.15 per cent to 3.3 per cent. With a purchase price of $350,000, for example, a 5 per cent down payment would mean $17,500 down and a mortgage of $332,500. With the lower insurance premium of 3.1 per cent, the insurance payment would be $10,473, but with the higher flex down premium the payment would be $11,138. It’s not a huge difference, so the real question is whether the purchaser qualifies for flex down based on credit and debt-to-income ratio.
- Lenders will factor in the alternate down payment source.Since the purchaser is borrowing money for a down payment, lenders will calculate this into their estimation of the monthly obligations. They will typically use 3 per cent of the outstanding debt as the monthly payment for the debt on the down payment for unsecured loans or a line of credit. For example, if someone used $10,000 of their line of credit or personal loan, the lender will calculate $300 as their monthly repayment in addition to their other debt for the mortgage or any outstanding student loans. If lenders feel that the amount of debt is too high relative to income, they may not approve the loan application.
While flex down payment options are a little more rigid than traditional mortgage offerings, they can help buyers get into a home sooner than if they waited to save up a down payment. For some people, that’s a trade-off they’re more than willing to make.