Banks Attempt to Circumvent Canada’s New Rules with Creative “Cash-Back” Mortgages
Earlier this month the Canadian Department of Finance announced new mortgage regulations designed to prevent a US-style housing meltdown. The rules require a minimum 5% down payment and a 35yr limit on amortization for government-guaranteed mortgages.
Banks loath to lose a chunk of the home-buying market have found a way to rebrand their old “zero-down” mortgages as “cash-back” products, whereby the bank loans the buyer the 5% down payment at a much higher rate and allows buyers 95% mortgage financing.
Since the mortgage loan itself meets the 95% maximum, it is eligible for government backing — thereby protecting the lender from default risk for the bulk of the loan.
This tricky new practice will be up for discussion at an upcoming meeting between banks and the Finance Department.