Growing optimism and a rebounding housing market are threatening to lift demand for cash-back mortgages in Alberta, cautions a leading Edmonton broker, asking his peers to guide clients to sounder alternatives -- and not only because of lingering economic uncertainty.
“I am also very optimistic about the province’s economic future, and not just because I’m in the province,” Gord McCallum, principal broker and owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca. “There is tremendous growth potential; the fundamentals of the economy are sound; we have a young, educated population, in addition to the oil industry.
"I do think that will encourage young buyers to look to get into the market as it continues to rebound and that will lead to growth in demand for cash-back mortgages from those workers who don’t have the down payments, but have good jobs and income and don’t want to wait.”
Turmoil in 2007 and the following recession put the kibosh on what many in the industry saw as a dangerous spike in $O-down mortgages. That product had particularly disastrous consequences in Alberta as inflated home prices fell 17 per cent and unemployment grew, sending many $0-down homeowners into default.
While housing prices haven't fully regained their value, today’s young buyers are now benefiting from this year's employment boost, courtesy of the province’s resurgent oil industry, said McCallum. Many are now looking to access homeownership at today's lower prices and before they've had time to save a 5 per cent down payment. Increasingly-aggressive lenders are also fueling interest in cash-backs.
Under the terms of those loans, the borrower’s 5 per cent down payment, excepting legal costs, are fronted by the banks, which in exchange charge homebuyers the posted rate, and not the discounted interest charges associated with A lending. It means the client pays thousands more over a standard five-year term, said McCallum.
The threat of a double-dip global recession – and its impact on demand for Alberta’s oil -- is also a concern for clients opting for cash-back mortgages. Specifically, they could well be left with no equity in their homes should the province’s economic recovery slip.
“If the client absolutely isn’t prepared to wait to save a down payment,” McCallum told MortgageBrokerNews.ca, “there are still better, cheaper options brokers need to be offering them, other than a cash-back.”
Among them is the CMHC’s Flex Down product, allowing borrowers to use funds from any source not tied to the purchase of the home, including a gift or loan from family member.
Guiding prospective homebuyers to those other options and away from cash-back mortgages is another way Alberta brokers can differentiate themselves from the banks, say industry veterans.