In Canada, any home purchase made with less than a 20% down payment requires mortgage default insurance by law. This insurance protects the lender in the event that the borrower stops making payments and defaults on their mortgage loan. Without the protection of mortgage default insurance, many lenders wouldn’t want to take on what’s considered a “risky” mortgage, so having this option means that more Canadians can qualify for a loan and buy their first home. Read on to learn more about how insured mortgages work so you can better understand your financing options.
How Do I Pay Mortgage Insurance?
At the start of the mortgage, Canadian Mortgage and Housing Corporation (CMHC) insurance premiums must be paid in full, so if you plan to take out a CMHC-insured mortgage to purchase your home, you’ll want to be prepared to pay these costs when you close. The bigger your down payment, the lower your premium will be so it’s wise to understand CMHC’s breakdown of charges:
– 4% of your mortgage amount if your down payment is 5% – 9.99% of the purchase price.
– 3.10% of your mortgage amount if your down payment is 10% – 14.99% of the purchase price.
– 2.80% of your mortgage amount if your down payment is 15% – 19.99% of the purchase price.
You can use a mortgage default insurance calculator to help you better understand how much money your CMHC insurance might cost on your mortgage. Although this insurance costs the average Canadian approximately 2.8% – 4% of their mortgage, it makes homeownership possible for some who may not otherwise qualify for a mortgage. It’s also important to note that down payment assistance programs exist, so be sure to do your homework before you make any big financial decisions.
When it comes to paying your insurance premium, you’ll have two different options, and your payments will start on the day your mortgage funds are received:
1. Traditional insurance (sometimes known as high-ratio mortgages)
If your LTV ratio is 80% or greater, you’ll be charged a one-time premium. LTV stands for loan-to-value ratio and compares the amount of your mortgage with the appraised value of the property. The higher your down payment, the lower your LTV ratio.
This premium can be paid in a lump sum, or it can be added to your monthly mortgage payments. If you choose the monthly option, the premium is tiered and reduces as more of the principal is paid.
Since high-ratio mortgages need to meet strict mortgage loan insurance requirements, they all share a few different features including a home price of under $1 million, a self-funded down payment (no borrowing to cover the cost) and an amortization period of 25 years or less.
2. Portfolio insurance (sometimes known as bulk insurance)
If your LTV is less than 80%, you’ll have this option for a premium as well. Often buyers don’t even know they have the coverage as it’s paid for by the lender. It’s often used by lenders like MCAP, First National or THINK Financial who are monoline lenders (those who offer only mortgages and often have lower rates as a result).
How Much Can I Get Preapproved For?
In order to get preapproved for a CMHC insured mortgage, you’ll need to meet with your broker or lender in the same way you would when applying for a conventional mortgage preapproval. A mortgage prequalification is often a basic financial evaluation. If you’re preapproved, it means that a lender has stated that you qualify for a mortgage loan based on the required information (income, employment, financial history etc.) that you’ve provided. A mortgage preapproval will often specify a term length, interest rate and even principal amount to help you better understand what level of financing you can qualify for before you begin looking at houses.
When Do I Stop Paying Mortgage Insurance?
Most Canadians opt for the premium to be broken down into monthly payments. This means that you’ll pay mortgage insurance for the life of your mortgage.
Insured Mortgage Vs. Conventional Mortgage
One con of an insured mortgage is that they cost more than conventional mortgages. Regardless, with the ever-rising price of real estate in Canada, they’ve become much more popular. Insured mortgages allow you to become a homeowner sooner by not having to worry about saving up as big of a down payment and because lenders are protected should you default on your loan, they’re able to offer better interest rates. Since the mortgage insurance premium is most often added to your monthly mortgage payments, it’s important to note that it will reduce your home equity after accounting for the total mortgage amount. In addition, if you live in Manitoba, Ontario, Saskatchewan or Quebec, provincial sales tax will apply to your insurance premium, but you can’t add that tax to your mortgage as you’ll have to pay it up front.
Conventional mortgages don’t require insurance payments upfront, so in the long run they’ll save you money. You won’t need to borrow as much, so you’ll pay off your loan quicker and have fewer interest payments over the life of the loan. Conventional mortgages also offer longer amortization periods (35 maximum instead of 25 with an insured mortgage) and allow you to build up equity in your home faster than with an insured mortgage.
If you find yourself looking at insured mortgage options, just know that you’re not alone! Insured mortgages offer many benefits for Canadians, especially those looking to purchase their first home. Insured mortgages are designed to protect lenders from a risky investment, but they also provide more options and flexibility as a borrower, should you choose that route for financing. If you’re interested in learning more about your mortgage options, connect with our qualified team members today!