The Five Percent Down payment Program

Through C.M.H.C. loan insurance, house purchasers are now able to buy a home with only 5 percent down, whether it is their first, second, or third home. In other words, C.M.H.C. has dropped the requirement that the applicants must be " first-time home buyers".

There are certain rules that apply and these have been revised recently. For example, the maximum home price ceiling limits have increased. C.H.M.C should be contacted to determine the maximum house price in your area. Gross and total debt service ratios remain the same and the applicants must qualify based on the prevailing three-year interest rate , although any mortgage term may be selected.

C.M.H.C. has recently increased their fee for 95% financing and this fee now amounts to 3.75 % of the mortgage applied for. This fee may be added on to the mortgage amount, however, this additional cost will have a slight impact on the payment amount which in turn will also affect the gross and debt service ratios, which are used to qualify the applicant. (C.M.H.C.  also has a nominal application fee)

This mortgage insurance fee is a one time fee paid by the borrower to the mortgage insurer, and it does increase the borrowing costs quite significantly. For example, for a mortgage amount of $95,000, the fee will be $3562.50. Homeowners should consider that if this down payment could be increased to 25 percent of the purchase price of the home, the C.M.H.C. fee can be avoided altogether. Alternatively, increasing the down payment by any amount over the five percent minimum will reduce the C.M.H.C. fee, which reduces as equity in the purchase (the down payment) increases:
 

- fee up to 80% of value - fee up to 85% of value - fee up to 90% of value - fee up to 95% of value

- 1.25% - 2% - 2.5% - 3.75%

One way to look at this additional C.M.H.C. cost is that, for the other $20,000 down payment required, you're paying a $3562.50 fee which is equivalent to 17.8 percent on this additional $20,000 of financing. Furthermore, this fee has the impact of increasing the "effective" interest rate on your mortgage. For example, based on a mortgage interest rate of 7 percent per annum, and a three-year term, the effective interest rate would increase to 8.44 percent. For a five-year term, the effective rate would be 7.94 percent, and for a ten year term, it would be 7.58 percent.

One option to eliminate the insurance fee may be to increase the down payment from 5 percent to 10 percent of the purchase price, and obtain secondary financing to the 90 percent level. For example, on a $100,000 purchase, there would be a conventional first mortgage of $75,000, a second mortgage for $15,000, and of course, the $10,000 down payment. The disadvantage with this scenario is that high ratio second mortgages are much more expensive in terms of interest rate than first mortgages. They run anywhere from 5 percent to 7 percent higher than a conventional first mortgage. Nevertheless, it may be a viable option for those who anticipate receiving a lump sum of money a year or two down the road and are therefore able to repay this expensive money in a relatively short period of time.. Another potential option may be to borrow the difference between the 5 percent down payment available and the 25 percent down payment required to obtain a conventional mortgage, from a relative.

Unfortunately, in the majority of circumstances, no other financing or borrowing options are available, and the 5 % down payment program is a legitimate answer to home ownership for many purchasers.

Finally, one of C.M.H.C.'s programs allows borrowers to finance up to 90% of property value to consolidate by way of either a first or second mortgage. To avoid the prepayment penalty on your first, the best option may be C.M.H.C. insured second mortgage. If your lender will not do this type of mortgage for you, you may apply online, and we will do our best to secure a C.M.H.C. insured second mortgage on your behalf.