Thinking of buying a home, but have a down payment of less than 20%? Are you familiar with mortgage loan insurance? This solution could allow you to purchase a home with a down payment of at least 5% of the selling price. Here’s how it works.
It’s insurance that protects the lenders (the banks), while allowing buyers (that’s you) to purchase property even if they only have 5% of the selling price as a down payment.
Why does it exist? Because that way, if you’re unable to provide 20% or more of the property’s price as a down payment, banks can require your loan to be insured by a third party.
When you’re covered by mortgage loan insurance, your bank can recover the money they lent you should you ever default on your payments. This alleviates some of the risk when you apply for a mortgage.
In Canada, the main mortgage loan insurance provider is the Canada Mortgage and Housing Corporation (CMHC), a company tied to the Government of Canada. But there are also private lenders that offer this kind of insurance policy, like Sagen (previously known as Genworth) and the Canada Guarantee Mortgage Insurance Company.
If you only have a 5% down payment, you may be eligible for this program, but there are other criteria to take into account to determine if you’re a good candidate.
The property price: The minimum down payment needed to benefit from mortgage loan insurance depends on the purchase price of your home.
Your credit score: To qualify, you need to have a minimum credit score, as determined by the CMHC. The eligibility criteria, including those tied to your credit score, can change quickly. That’s why we recommend doing your research before applying.
Your debt-to-income ratio: The CMHC has also lowered the ratios that help lenders determine the maximum amount they can lend you – meaning the gross debt service ratio (GDS), which is the percentage of your gross income that goes towards housing fees for the home you’re looking to buy – and the total debt service ratio (TDS), which are your future housing fees plus your other debts. Once again, you’re better off checking the criteria required by the organization, as they can change without notice.
Lastly, according to the new rules, future homeowners can no longer borrow money for their down payment using unsecured personal loans or lines of credit.
Thinking of buying rental property? Please note that the CMHC offers mortgage loan insurance for this kind of property too, whether you’re an owner-occupant or not.
If you’re a renter, mortgage loan insurance could help you go from renting to owning if that’s one of your goals, and it won’t impact your financial situation.
Plus, since it reduces the risk for banks, some of them may be able to offer you better borrowing conditions and better rates.
However, do the math before signing up for mortgage loan insurance and becoming a homeowner. There are many other fees that come with buying a home. On top of your mortgage, don’t underestimate setup costs and fixed expenses for the home. You’ll also have to make sure your budget makes sense and that you’ll still be able to save for other goals, emergencies, and your retirement.
Obviously, you’ll have to pay a premium for mortgage loan insurance. This premium is a percentage of the mortgage and is based on your down payment. The bigger it is, the lower your premiums will be.
For example, if you purchase your home for $375,000 and have a 5% down payment of $18,750, your mortgage loan insurance premium will be $14,250.
Similarly, with a 10% down payment of $37,500, the premium will be $10,463.
The important thing to remember is that this kind of insurance has a cost. Take that into consideration before going ahead and buying property. There are two ways to pay the premium:
There’s only one way: you must increase your down payment by finding another source of financing, like if you receive a non-refundable amount of money as a cash donation from a loved one.
If you’re a first-time buyer, you can also use the Home Buyers’ Plan to borrow money from your RRSP to increase your down payment.
There are also government programs aimed at helping first-time buyers afford property, like the First-Time Home Buyer Incentive from the Government of Canada, which offers a percentage of the home’s purchase price to put towards the down payment. Take the time to research the eligibility criteria and read the fine print.
It’s important to differentiate mortgage loan insurance from mortgage life, mortgage disability and mortgage critical illness insurance. Those are the kinds of insurance policies to sign up for if you want to cover your loan in the event of death, disability or a critical illness. You can consider these solutions if you want to protect your quality of life and your loved ones (as well as yourself) if something preventing you from making your payments should occur.
It’s not unusual for a first-time buyer to decide after a few years to buy a new home because their family is growing, they get a job in another place, or they simply want to invest in real estate. Regardless, chances are that a new mortgage will be required. What would you do?
In most cases, mortgage loan insurance providers offer the option to transfer your premium to another mortgage loan. The eligibility criteria and your options after buying another property largely depend on your situation, your loan amount, your premium, and how much you’ve paid off. Organizations like the CMHC invite clients to call them for more information.
Don’t be shy to get advice from an expert. They will be able to help you weigh the pros and cons of getting mortgage loan insurance, and they’ll help you with the calculations. Our advisors can help you make an informed decision. We’re here to answer your questions.
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