Today, we present a guest post by Kerri-Lynn McAllister, the Community Manager for RateHub.ca, a website that compares mortgage rates in Canada and hosts mortgage education and tools.
What do you do if you can’t afford the deposit?
Let’s say you are interested in buying a pre-construction condo but you do not have the required 15%- 20% deposit. What are your options? Do you even have any? We did not think so until we came across an innovative deposit loan product which is offered by BMO.
Essentially, if you make the Canadian minimum 5% down payment towards the deposit, the remainder of the deposit (up to 10% of the purchase price) will be loaned by BMO. On a $350,000 condo this is a difference of $35,000 [between $17,500 (5%) and $52,500 (15%)]. Such a significant capital loan opens up the opportunity to buy pre-construction to a whole new segment of buyers, including younger first- time buyers who are less likely to have the cash to meet the large deposit requirements.
Borrowers also have access to a rate of Prime +1 on the loan and only have to make interest only monthly payments.
There are, however, some restrictions to this product. For one, BMO only offers the product on certain projects negotiated with builders. Speaking with a few realtors specialising in pre-construction, we can name Canderel Stoneridge, Graywood, Lanterra and Cityzen as some of the developers offering the BMO deposit loan on select projects. There are some big developers who are noticeably absent from offering the loan, however.
Although the minimum monthly payment on the loan is interest only, the loan must be paid off in full before your condo closes. This means that while you may have been $35,000 short on the initial deposit, you have to come up with those funds before your condo is completed only a few years later.
Finally, the biggest restriction is that you are obliged to take out your future mortgage with BMO under their capped rate program. Normally, you can shop around and compare mortgage rates when your condo closes, but with this BMO loan you are bound to take out your mortgage with them at the rate offered to you. When you sign up for the deposit loan, you are also signing up to a capped rate commitment based on posted mortgage rates (which are much higher than ‘discounted’ or competitive rates found on the market) with the option to lock in to a more ‘competitive’ rate later on. However, there is no guarantee as to how competitive this mortgage rate will be. BMO has your business at this point and you have limited negotiating power.
So, while there are definite opportunities to be had with this deposit loan product, it is important to consider the limitations as well.
Have you had any experience with this product or similar products offered by other banks?