Zero Money Down Mortgages
August 3rd, 2009 Posted in Mortgage
Zero Money Down – A Controversial Way Of Borrowing
When borrowing money to pay for a house purchase, it is considered desirable to have at least some capital to put towards the purchase as a deposit. Many banks – indeed, the majority of banks – will positively insist upon you presenting a deposit for the loan, as much to demonstrate your own good faith and financial standing as anything else. It is widely held to be a good idea to have a deposit for many reasons. For one, it can dramatically reduce the amount that you need to borrow and even make the term of the loan shorter – highly desirable for many people – and for another, it is known that banks will offer more leeway in loan deals to customers who offer a deposit. Among the things they do to provide this leeway is give a better deal on interest rates.
In recent years it has become more and more possible, however, to borrow 100% of the value of a house without laying down a deposit. This is a type of mortgage that is referred to as “zero money down”. This is a controversial way of borrowing and there have been moves afoot by the Canadian government to discourage the practice. Already they have decided that they will not back with federal funds any mortgage that has been agreed without any deposit, because of the perceived high risk of this manner of lending. Why do people go for this kind of borrowing, then, if it is so risky and morally questionable that the government has ceased to back it and discourages it as a practice?
The principal reason why people are perceived to go for zero money down mortgages is that they are well-paid professionals with little or no money saved. The typical person who satisfies this description would perhaps be a high-powered recent graduate who has been fast-tracked into a good position in a thriving company. They do not have the amount of money desired as a deposit – often in the early five figure bracket – but they are fully capable of making the monthly payments. As they can prove their earnings to be of a suitable level, and are expected to retain high earning power for the duration of the loan, they will often be given a high-value loan. This hypothesis, as you will see, is not without its flaws.
An entry-level graduate may well have excellent earning potential right now, but their ability to maintain that level has not been tested in the conditions of the market, and it could be a few years before they are found wanting. Their higher level of monthly payments necessitates a higher level of insurance, insisted upon by the bank for just that reason. This sets up an opposition between those who decide to save for a deposit, thus missing out on the benefits of owning their own home younger but finding themselves in a better position to meet payments even if their earnings drop, and those who go straight for the home ownership but play at higher stakes. At a time like this, the smart money has to be on the former group to come out of it better, as even the largest companies are having to tighten their belts at the moment.
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