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. 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 what we nowadays commonly call a "Zero Down Mortgage" as 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.
If you buy a condo today at $500,000 in the Lower Mainland your downpayment minimum $25,000.
It can take an average person / 2 persons to save that in roughly 3 years. $8000 per year.
Condo's today are at some of the lowest prices in years. Historically increases 3-5% per year in value.
$500,000 @ 3% per year is $15,000 per year.
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 but not a HELOC.
The amount of a down payment in a Flex Down Mortgage is flexible based on the property value. For example, for a property valued under or equal to $500,000, a 5% down payment is required. For any property greater than $500,000 but less than $1 million, a 5% down is required for the first $500,000, with an additional 10% required on the rest. To qualify, a Flex Down Mortgage product must be on a first mortgage, not a second, third, or in a refinance.
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)
Loan to Value between 90-95%
Maximum 25-year amortization
For the Flex Down, a buyer could borrow from:
Personal loans and RRSP Loans
Unsecured Lines of Credit
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.
Lenders will factor in the alternate down payment source when they look at your loan application. They will calculate the down payment into the monthly obligations. Typically, they will use 3% of the outstanding debt as the monthly payment for the debt on the down payment. They may not approve the loan application if they feel the debt is too high relative to your income.
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.
You put less money down.
You may be able to buy sooner rather than wait years.
You can stop wasting money on rent.
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.