Creativity still plays an integral part of home purchasing, and money savings. Yesterday, Mark & Jolene left my office $4000 richer than when they came in. Here’s the scenario.

Our couple want to buy a duplex (two units stacked one on top of the other). Their thought is to get the rental income from one unit to help defray the total cost of ownership. We went through the pros & cons of such a purchase, and they decided they still wanted to go that route. They had found a duplex selling at $188,000 with the upper unit already rented at $1050 per month (plus electricity). Their provable income was $75,000 per year. They had accumulated $22000 over the years, and wished to put $18,800 (10%) as down payment, with the balance of their cash for closing costs. They would finance the remainder. Their credit rating was excellent!

Had they obtained maximum financing (90% financing), we would have had to finance through the auspices of a high ratio insurance company, like Canada Mortgage & Housing Corp (CMHC) which protects the lender against default.. These high ratio insurance companies charge insurance premiums. In our case, the fee would have exceeded $4000 (2.5% of the mortgage amount). Notwithstanding the fact the insurance premium is normally added to the mortgage, our couple would have paid interest on that amount over the next 25 years.

I asked them if they could muster up 25% as a down payment. The answer was no! I asked them if either had parents with a little money. Mark’s answer was positive but was extremely reluctant to approach his father for a loan. I intimated that this would be a business proposal to his father, not a loan. His father may be able to get 5% from normal investment sources, while our couple would be paying the equivalent of 7% (the first mortgage rate). His father could register a 2^nd mortgage on the property as security for this business investment. If his father will help out and add $28,200 to the down payment portion (totaling $47000) , then our kids do not need CMHC coverage. That would save them over $4000 at the onset, not to mention the avoidance of interest on that amount over the next 25 years. In five years time, if the property appreciates by 3% per year, our kids could put both mortgages together at that time (which would add up to less than 75% of the then value of the property), pay back dad and avoid the CMHC surcharge altogether.

This method of financing promotes savings for the new generation, while providing a better rate of return for the older generation. It becomes a win/win situation for all concerned.