Down payment financing opens doors, but at what cost?

A new service has arrived on the Ontario real-estate scene that promises to help prospective homebuyers come up with the cash for a down payment, but one expert says the list of risks and caveats is considerable.

Ourboro is a new Ontario-based financing company that will contribute between 25 and 75 per cent to a down payment for first-time home buyers in Toronto, Hamilton, London, Kitchener-Waterloo and Guelph, in exchange for an unequal share of the home’s appreciation in value. Since it was launched in January 2022, it has received more than 800 applications and contributed $5 million to house down payments.

Instead of paying Ourboro back in regular payments at a given interest rate, borrowers repay the company’s share of the equity when they sell their home. The company considers the transaction a shared ownership arrangement, rather than a loan.

Ourboro’s Preya Kaur said the program can help people who are stuck in an endless loop of renting and trying to save up for a down payment.

“At least with Ourboro you’ll be able to get into the market. Without Ourboro you’re stuck in the rental market, at least that’s the case with the many homeowners we work with,” Kaur told CTV News Toronto.

However, mortgage broker Mary Sialtsis warns that, while the barrier to entry into the housing market might initially feel low with a contribution from Ourboro, “it’s going to come at a very, very high cost,” especially for people who pay a high share of their down payment through the program.

“For somebody who has to have 75 per cent of their down payment coming from a third party, they’re going to lose 75 per cent of the equity in the home when the time comes and they sell it,” Sialtsis told CTV Your Morning on Monday. “But during the time that they own it, they’re the one making all the payments, not this lender.”

For example, a homebuyer purchasing a house for $1 million, might lean on Ourboro for 65 per cent of a $200,000 down payment, meaning Ourboro pays $130,000 and the owner pays $70,000. If the home eventually sells for $1.5 million, Ourboro gets 65 per cent of the amount left after the mortgage is paid off and the bank has returned the homeowner’s mortgage principle back to them.

If the amount left over is, for example, $750,000, $487,500 from that total goes back to Ourboro, compared to their initial investment of $130,000.

Sialtsis said homebuyers working with Ourboro also risked being turned down for a mortgage by banks hesitant to take a risk on a property co-owned by another lender.

“A lot of lenders are not comfortable with it, and that’s why they’re not moving forward with offering financing,” she said. “So you’d have to use an alternative lender. The alternative lender will charge extra fees and a slightly higher interest rate, so it might not be the best option at the end anyway.”

OTHER OPTIONS

Sialtsis said prospective homebuyers struggling to come up with a 20 per cent down payment might still be able to break into the housing market without relying on companies like Ourboro.

One option, she said, is to consider co-owning a home with friends or family. In this way, the parties can agree on a more equitable ownership agreement tailored to their situation and preferences. For example, if one party contributes more than half of the down payment, they might consider the amount over 50 per cent a loan to the other party that they receive back with interest when it comes time to sell the house. Or, they might contribute more than half of the down payment, along with the same share of the mortgage and any money invested into the home, and then pocket that share of the equity when the house is sold.

“I currently have clients that are sisters who are looking to buy together, and it’ll be a two-family home that they’ll live in together,” Sialtsis said. “So it’ll still be a co-ownership, but at least that’s between the family members.”

Another option for homebuyers who are a few percentage points short of paying a 20 per cent mortgage is to speak with a financing expert about contributing to a smaller down payment.

“If you’ve got, say, 15 per cent of the down payment on your own, maybe that’s enough to get you where you need to be,” she said. “If you need to borrow the final 5 per cent, borrow it…you do have the option of putting down less than 20 per cent.”

Ultimately, Sialtsis said one of the best things to do when faced with uncertainty about how to finance a home is to seek advice from experts and know what all your options are.

“I highly recommend they check with someone,” she said, “especially in this scenario that feels desperate, it’s even more opportunity to do your research.”


— With files from CTV News Toronto Consumer Alert Journalist Pat Foran

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