Five years ago, Jim attended one of those seminars that promoted buying with no money down.  He was paying rent of $850 per month, and his cashflow indicated he could afford another $200/mo, but he could never amass the down payment.  This, he thought, was the perfect opportunity to buy his own place, while still maintaining cashflow parameters.

The promotion was to buy a certain unit for $94,000.  The promoters ( a real estate company) made arrangements with a mortgage broker to provide:
 a) a first mortgage of $70,000 at a rate of 7% for five years (payments of $491/mo).  Since the going rate at the time was 8.5%, this was a super deal;
 b) a second mortgage of $15,000 at a rate of 14% for a one year term (payments of $176/mo), renewals were guaranteed;
 c) and an unsecured line of credit (LOC) for $10,000 at Prime + 6% with interest only payments (averaged $121/mo);
 d) plus the taxes and condo fees ($150 & $115 respectively).
He could afford the $1053/mo total.  The plan called for the debt to be amalgamated into one new loan five years from the onset, thereby creating a purchase with no down payment.

Here we are five years from the beginning.  Jim still owes $63,700 on the first mortgage, $14,500 on the second mortgage, $10,000 on the LOC, and his taxes and condo fees have gone up to $180 & $168 respectively.  The promoter is no longer in business but the mortgage broker is still around.  He applies to get all the debt together ($88200) only to be told that the unit value has remained at $94,000 therefore, since the loan-to-value ratio exceeds 75% financing, he cannot put all the debt into one mortgage.  The cheapest way of proceeding is to renew the first mortgage, the second mortgage and continue paying on the line of credit.

That was not supposed to be the deal.  He was supposed to be able to put all loans together at this point in time.  The answer from the broker was accurate, " the real estate market was supposed to escalate, and it did not!"  Jim's cashflow is very tight.  He was hoping that given today's interest rates, he could save some money and lower the payments. Has the system just swallowed up another Consumer?

Not wanting to give up, he called me for an interview.  I listened to his story with interest.  I remember the promotion.  We needed a solution.  The answer was right in front of our noses..  Surely he was not the only person is this project to be caught up under the same "deal".  I suggested he canvass the neighbourhood for a person in a similar situation.  He could trade houses with that person.  We found a family in exactly the same situation, so they offered to buy each other's home for the market value ($94,000).  As Jim received the money from his neighbour, the debt on his present home was paid off by the lawyer.  That left $5800 ($94,000 minus $88200) to be used as down payment (5%=$4700) and legal fees inclusive of land transfer tax.  The same deal worked in reverse for the neighbour, Jim's new mortgage money coupled with his down payment, paid off the neighbours' three debts, leaving them enough money to complete the purchase.

The new loan looks like this: $94,000 less 5% down = $89,300 plus the CMHC high ratio insurance premium ($3348.75) = the new loan amount of $92,648.75  At today's discounted five year term rate (6.1%), that equals payments over 25 years of $598.29 + the condo fees and taxes = a grand total of $946.29 That will lower his cashflow by at least $189 per month.  He now only has one loan, and every month the principal is going down, unlike his first five years where the money paid to the line of credit was interest only.

The solution may not work in every situation because of varying degrees of up-keep within the units, but it sure beats doing nothing about the three outstanding loans.  There are derivatives of this same idea that can be applied to various situations.  Imagination is simply a tool for success.