Brokers are increasingly diverting no-money-down clients into switch-backs as a cost-effective way of satisfying the growing demand for cash-back mortgages – especially in markets where rent increases have outpaced stagnant home prices.
“I would say that in Chilliwack it has gotten to the point that it just makes more sense to buy rather than rent from a cost perspective,” Jordi Browne, with VERICO Preferred Financing Inc., told MortgageBrokerNews.ca. “What that means is that we have clients that have good credit but are challenged in buying with the down payment. I’m doing some cash-backs, but I’m mostly arranging switch-backs instead in order to help them access those low rates.”
A growing number of brokers are doing the same as they move to help clients get into properties now rather than defer that purchase for even a year.
Predictions for continuingly low interest rates well into 2013 have removed the sense of urgency for many clients willing to save toward a down payment, but many more are committed to buying now as rental increases and Western employment growth challenge the soundness of that strategy.
Browne – No. 25 on last year’s CMP Top 50 – is largely focused on channelling those clients into switch-backs, helping them avoid the interest rate premiums banks attach to those no-money-down mortgages.
Under the terms of those loans, the first-time borrower’s five per cent down payment, excepting legal costs, are fronted by the banks, which in exchange charge homebuyers the posted rate, and not the discounted interest charges associated with A lending. It means the client pays thousands more over a standard five-year term.
Browne’s switch-backs hinge on arranging unsecured lines of credit with a lender independent of the mortgage. That money is earmarked for the down payment, he said.
Browne then focuses on securing a standard mortgage with another lender at discounted A rates, and not the posted ones associated with the cash-back.
That can result in a savings of hundreds of dollars each month, he said, with the strong likelihood a disciplined borrow can divert that savings into paying off that line of credit within the first few years.
Brokers in Alberta in particular are anticipating a spike in the number of clients looking to get into properties without any savings to cover down payment requirements.
Still, brokers may want to think about guiding clients away from cash-backs to sounder alternatives, said one industry leader – and not only because of lingering economic uncertainty.
“If the client absolutely isn’t prepared to wait to save a down payment,” Gord McCallum, principal broker and owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca, “there are still better, cheaper options brokers need to be offering them, other than a cash-back.”
Among them are the CMHC’s Flex Down product, allowing borrowers to use funds from any source not tied to the purchase of the home, including a gift or loan from family member.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate