27 Feb 2020

Four Ways To Buy A House Without Money

Today I’m going to talk about how to buy a house without any money. I know it sounds like a little bit of a trick, a gimmick, a “click-baitey” type of headline. Yup! You got it! If it walks like a duck and talks like a duck… well the truth is you should not buy a house without any money but if you had to, here’s how you’d do it.

  1. Use a LINE OF CREDIT.
  2. Use an RRSP LOAN.
  3. Beg your parents.
  4. Borrow against your parents.

Let’s start with the first way.

Using a line of credit and letting the lender know means you’re entering what’s known as “Flex-down” territory. This means you’re saying to the lender “look! I can borrow from my line of credit, and even with the repayments, I can afford this mortgage”. This is only reserved for “high-ratio” loans (less-than 20% down) and not every lender does this. The amount of repayment I have to use is 3% of the balance of the line of credit.

Example; your down payment is $30,000.

You take out $30K from your line of credit.

Your repayment for my purposes is 3% of $30K or $900.

Truth: It really adds to the “borrowing ratios” and therefore you have to have a really good income and credit to get past this.

 

Second: An RRSP loan. One of my favourite moves.

Say you’ve been working forever and simply can’t get your ducks lined up in a row to save save save. BUT – you have a LOT of RRSP room! You take out an RRSP loan, amortize it to the longest timeframe possible (usually 15 years) and use that RRSP money on the 91st day (or later) to use as your down payment. This will also benefit you because you can use the RRSP refund to pay back some of this loan (usually ¼) (or you can spend that refund on things like a new TV for your new condo). Don’t! It’s a bit of a double-whammy because you are 1. Repaying this RRSP loan and 2. Repaying “yourself” back from borrowing against it so you’re kind of double-contributing to this.

Example: a $30,000 RRSP loan over 15 years at Prime+2 would be about $251/month. THEN you have to pay off $30,000 over 16 years interest-free at $156 per month. So your monthly obligation would be $407 to get this done. However you’ve bought a house/condo. Yay!

 

Third: Mom! Dad! Can I have some moneeeey?

Simply put the wealth transfer that’s currently happening is one of the most influential bits of behind-the-scenes tsunamis that is powering our housing market. When this wealth transfer dries up, the market will slow. Good thing it won’t happen for a long, long, long time. I’m 42. My parents’ generation is giving money to their kids like crazy before they die, so their kids can buy houses. I know my son will get some money when I’m older because – well – the market will be even more crazy by then. Speak to someone who studies demographics to see how important this really is (that’s not me!). There were a LOT of baby boomers who got VERY rich luckily by buying real estate and now their returns are being passed down to the next generation(s). How else do you think a lot of these buyers afford properties? Gifts! 

Gifts are non-taxable, they must come from immediate family members, but they are one of the most popular forms of down payment. Getting a gift is the easiest and fastest way to accelerate your real estate journey. I hope it doesn’t come with any strings, which may seem impossible. There are some other rules around gifts but we can chat when you’re good and ready to discuss those.

 

Fourth: This one is my favourite. Mom and Dad, can I borrow some moneeeey?

Say your parents got filthy rich but they’re also old-school. “If I did it, so can my kids!”. Wrong. Not today. A lot of kids need help and here’s one way of doing this. Using rich parents’ Home Equity Line Of Credit! Here’s how I propose this to my clients.

We take the Home Equity Line and we borrow 20% for the purchase. Say the house we want to buy is $500,000, we need $100,000.

We save on CMHC (because we have 20% down).

A $100,000 line of credit would cost you $367 per month to “carry”.

A $400,000 mortgage would cost you $1638 per month.

In 5 years, we’ll pay mom and dad back. We need the value of this property to be worth at least $625,000 so that we can take a $500K mortgage and pay your parents back. Why? Because you can only refinance a property to 80% of its market value. So this might take more than 5 years, or, heck, even less. The point is – this is how we can make it happen over time.

 

So there you have it. Four ways how you can buy a house without having any money. Is it ideal? No. But like my good friends Melanie and Brendan say  – if you wait… if you keep waiting… the train might leave the station. Let me know if you have any questions, comments, or other things to say about this! I’d love to hear it on my facebook page. www.facebook.com/mortgagejake or jake@mortgagejake.com

 

 

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