On October 14th,
2008, 40-year amortizations along with 100% programs in Canada officially disappeared as per legislation by
the Canadian Ministry of Finance.
However, there are other forms of 100% financing that do still exist. Its most common form is in “cash back”
programs from lenders. Cash back can be a great way to add value to your transaction.
Let’s say you want to do some renovations on the place you are purchasing. Traditional purchase plus
improvement programs require that you pay for the renos to be performed upfront. Once all the renos have been
completed you have to submit your paid invoices and receipts to be reimbursed. You may even be required to
have an appraisal performed at your own expense. This may be fine if you are having substantial renovations
performed. However, if you have something you are doing on a smaller scale, cash back may be appropriate.
With smaller applications — like floors, carpets or new countertops — the cash-back program can work in your
favour. Your cash back is disbursed up front upon completion of the transaction, so you can use it right
away.
You can also use the cash for other purposes such as furnishing your new place. After taking possession of
your home, you will have the extra cash for the additional items you wish to purchase.
Cash-back funds can also be used for closing costs, which can include PTT, legal fees, title insurance,
survey, and your portion of property taxes owed. PTT alone is 1% of the first $200,000 and 2% on the balance.
On a $350,000 purchase this amounts to $5,000 alone. If you used a 3% cash-back product with your purchase,
you would have $10,500 dollars to work with. You would be able to comfortably pay for your property transfer
tax and legal fees, and still have a bit left over for furnishings if you wished.
So why don’t you use the $10,500 for a down payment? There are a few lenders out there that will allow this,
and some that won’t. If you do choose to use it for down payment you will need to make sure you can do 5% in
cash back. You may also be able to go in with a smaller down payment, such as 2% of your own money, and
receive 3% cash back to make things happen. This is a great scenario if you found the place you absolutely
must have but are limited by down payment. Keep in mind that you will still have to bring money (roughly 2%
of your purchase price) to the table for closing costs.
You can also tie cash back in with your investment strategy. You could use the cash back to buy investments
and add to your portfolio. This will require a good chat with your financial planner. Ultimately you will
want to make sure that your return on investment is greater than your cost of funds, and that it aligns with
your goals.
Cash back is a bit more expensive with respect to rate. It’s usually posted rate vs. fully discounted rate if
you didn’t use a cash-back product. If you pay out the loan early you will also have to pay back a pro-rated
amount of the cash back you borrowed over and above your penalty. You’re paying a bit more, but you got into
the market earlier, and have a tangible asset sooner rather than later. This is a fair price to pay
considering in hindsight, the cost of not purchasing sooner rather than later would be far greater. •
Contact Michael McIvor at michael@michaelmcivor.com
