Posted by: MonsterMortgage.ca
Mortgage default insurance is one of those things that many home buyers don’t often think about when purchasing their new home. But if you don’t have at least 20% of the purchase price available as a down payment, you will need to purchase this form of insurance before you can arrange your mortgage.
Many home buyers, especially those purchasing their first home or those buying in one of the country’s more in-demand areas, often have less than 20% of the purchase price available as a down payment. In markets like Toronto and Vancouver where the average price of a new home is now well above $500,000, a 20% down payment easily exceeds $100,000. This is not an insignificant amount, and it is understandable why many fall short of this 20% down payment.
Conventional Mortgage Versus a High Ratio Mortgage
A down payment of 20% or more means you can arrange for a conventional mortgage. For the lender, this means the property has sufficient equity to protect the lender from a shortfall should the borrower default on the mortgage. A higher down payment also means the borrower has a greater personal investment in the property making them less likely to default.
For those with at least 5%, but less than 20% of the purchase price available for a down payment, it is still possible to arrange a mortgage, but this will be considered a high-ratio or insured mortgage. The higher loan-to-value (LTV) percentage of a high-ratio mortgage means there is less equity available to protect a lender from losses in the event of a default. To ensure lenders are able to provide mortgages to buyers with smaller down payments while still protecting the financial institution from the greater risk that comes with a high-ratio mortgage, separate mortgage default insurance is required.
While having to obtain mortgage default insurance does add to the cost of purchasing a new home, it also makes it possible for those with limited savings – particularly first-time buyers – to get into the market sooner.
Mortgage Default Insurance Providers
Many lenders will work with three approved mortgage default insurance providers. The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation and is the largest provider of mortgage insurance in Canada. Lenders may also work with Genworth Canada and Canada Guaranty in order to obtain the required mortgage insurance on your property.
The cost of your mortgage default insurance is typically added into your mortgage as part of the loan.
Insurance premiums are based on the amount borrowed and the down payment. To qualify for mortgage default insurance, the following conditions must be met:
– Minimum 5% down payment
– Single-family dwelling or two-unit building
– Total monthly housing costs not to exceed 32% of gross monthly income
– Total debt load not to exceed 44% of gross household income
CMHC also provides a mortgage insurance premium calculator so that you can calculate the cost of the mortgage insurance on your next property before buying. The calculator from CMHC can be found here.