Toronto Star
FROM CANADIAN PRESS

More Canadians will be able to cover down payments for homes under changes announced this week by Canada Mortgage and Housing Corp., but prospective buyers should still beware of taking on too much debt, experts said today.

CMHC's program has allowed buyers to pay just 5 per cent up front for a new or existing home insured by the federal Crown corporation. As of March 1, CMHC now will guarantee mortgages even if the 5 per cent down payment is covered by a bank loan or credit, rather
than savings.

That means people on the margins of home ownership can use non-traditional avenues that were previously restricted, such as loans, credit cards, cash-back incentives and repayable loans from parents. Others who were saving up for the 5 per cent may be able to move
in a little quicker.

But buyers should still use the same criteria when arranging a mortgage, by taking into account how a new loan or other credit for the down payment will effect monthly costs.

"You have to be a little more disciplined because there's more cash going out towards owning this home," said Scott Plaskett, a certified financial planner with Toronto-based Ironshield Financial Planning.

For example, said Plaskett, "if you use your credit card, you need to make sure that you are someone who can use a credit card from a disciplined standpoint beforehand."

The CMHC changes give more options for homebuyers with lower incomes, including students and recent graduates, who effectively will be able to borrow up to 100 per cent of the purchase price of a home.

"CMHC has recognized there's a specific segment of the population, in particular first-time buyers, who shouldn't have to wait to save a minimum 5 per cent cash in order to qualify for lending," said Andrew Moor, president and CEO of Invis, Canada's largest independent mortgage brokerage.

"It can take several years to save for a down payment, and Canadians with healthy incomes who understand what they can afford now have a number of new options available to them."

Among the new options, parents, friends and relatives can now lend money for a down payment without it having to be in the form of a gift. Also, "sweat equity" - the amount of money some people spend to help construct their own homes - can be factored into the down payment.

But Invis said the criteria for qualifying for a mortgage still haven't changed much. Although first-time buyers such as students may now be able to qualify for 100 per cent of the purchase of a home without an established credit history, they still have to have a healthy income and prove to the lender that they can afford a mortgage.

CMHC's program allows financial institutions to relax down payment criteria, "but they're still not going to lend you the money if you don't have he income to support the payments," said Peter Norman, vice-president of real estate economist group Clayton Research.

"This isn't a free-money environment," he said. "It's not as if anybody can walk off the street and get a mortgage on a $200,000 home and put no money down. They may be able to put no money down, but they're still going to have to be able to afford the $2,000-a-month payments, or whatever it turns out to be."

Norman doesn't expect the CMHC changes will significantly boost homebuying activity. Prices have been stable across the country, while interest rates remain low and are continuing to attract former renters to home ownership, he said.

But he does expect banks to unleash new home ownership programs that boast getting into a mortgage with "nothing down."

"I think they may respond with more overt marketing materials now towards what appear to be zero-down payment mortgages, though technically that's not what it really is," Norman said.

Plaskett advises buyers to factor in higher interest rates down the road, regardless of their down payment options, noting that currently low rates make mortgages more attractive - but won't last forever.

"Right now, interest rates are so low that more people can probably qualify for the (CMHC) program. But what happens when interest rates go up?" he said.

"Interest rates are low today but they're not going to stay low," added Plaskett, who often advises clients to make monthly mortgage payments that assume interest rates are higher than they really are, so they're prepared for increased rates in the future.

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