What is a Flex Down Mortgage and How Does It Work?
It can be challenging to save up enough money for a down payment of 5% or more, especially for first-timers or families.
A "borrowed down payment mortgage" lets you pull from a credit source for your down payment in order to let you purchase your home quicker.
This is nowadays is commonly call no downpayment is a "Zero Down Mortgage". It is zero cash out of your pocket when you utilize a borrowed source.
Let's look at why it might be a good idea.
I will say - you will be paying about $800-1000 more a month over renting costs right now in the lower mainland. You would only buy if you value equity increase or partnering on the purchase with a spouse or friend.
Condo Purchase: The young family or couple getting into the market
If you buy a condo today at $500,000 in the Lower Mainland your downpayment minimum $25,000.
Income to qualify is about $100k a year as of 2024.
It can take an average person / 2 persons to save that in roughly 3 years. $8000 per year.
Condo's historically increases 3-5% per year in value.
$500,000 @ 3% per year is $15,000 per year increase per year!
If you wait 3 years, you will pay $545,000 for the same condo and will need $29,500 for a downpayment! You need to come up with another $4500.
In typical mortgage rules, buyers must come up with their down payment, whether it is from their savings or it is “gifted.”
Gifted down payments are non-refundable, and given to the buyer from an immediate family member. These days, high rent and living expenses can make it difficult for buyers (especially first-time homebuyers) to save the required down payment (5% or more). Saving that much money can be daunting.
As a result, some lenders are offering a Flex Down Mortgage payment product, where all or some of the money can be borrowed from other sources such as a line of credit, credit cards or other borrowed sources.
Other Requirements:
You must have stable employment with a provable income and verify your employment (i.e., letter of employment, T4s, etc.)
You must have a credit score of 650 or higher.
You should have a soundtrack record (i.e., no previous bankruptcies and a minimum of 2-3 years of paying on time with no missed payments)
You should have very little debt and be able to accommodate the additional cost of higher mortgage insurance (the insurance premium could be up to 0.2% higher on a Flex Down Mortgage, which could equal $750 on a $500,000 mortgage. Amortized at 3% over 25 years, the payment could be an extra $3.55 per month.), mortgage payment, property taxes, heat, and condo fees (if applicable)
For the Flex Down, a buyer could borrow from:
Personal loans and RRSP Loans
Unsecured Lines of Credit
Credit cards
Gifts from non-family or non-immediate family members***
***immediate family members are defined as a father, mother, child, brother, sister, grandparent, legal guardian, or legal dependent)
There are some sources a lender won’t allow as a down payment source, but as long as it’s not from someone who has an interest in you purchasing the property, they will consider the down payment source.
While not all lenders will let you do a Flex Down Mortgage, some will. However, like any product, you need to be aware of the pros and cons.
Pros:
You put less money down.
You may be able to buy sooner rather than wait years.
You can stop wasting money on rent.
Stability of a home for your family
Cons:
Your monthly bills will increase because you now will have a line of credit to pay back.
Because your debt will be increased, your affordability will decrease.
While there are advantages and disadvantages to borrowing for a down payment, it will ultimately come down to your budget and comfort level. If you are confident you can afford the additional monthly payments, the Flex Down Mortgage may be a suitable option for you. However, if you aren’t comfortable or able to pay more, this may not be a good fit for you. Before you can decide, you need to know your options and what you can realistically afford.
There is always a way and with the right guidance I help you with a PLAN! Book a free meeting with me.
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