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Buying a home with mortgage loan insurance

03 January 2018 by National Bank
mortgage loan insurance

Did you know that mortgage insurance can allow you to purchase a property with a down payment of only 5%? Here's how to do it.

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With the rising cost of home ownership showing no signs of slowing down anytime soon, you might easily imagine that access to property ownership is more difficult these days. However, if you’re a potential home buyer with a down payment of at least 5% saved, there’s a solution that can help. Mortgage insurance. See how it can allow you to go from being a renter to a buyer.

What’s the difference between this insurance, and the kind you get through the bank?

It’s important not to confuse mortgage insurance with the life, disability or critical illness mortgage loan insurance you can get through your bank. The first is aimed at lenders, though it’s generally paid by the borrower. As for the three others, they are taken out by the borrower (that’s you!) to cover your loan in case of death, disability of critical illness.

What is mortgage insurance?

It’s insurance that protects lenders while simultaneously allowing consumers to buy a property even if they only have 5% of the purchase price. In fact, if a buyer can’t put down 20% or more of the cost of the home, financial institutions are required by Canada’s Bank Act to have the loan insured. This obligation, which applies to all Canadians, gives potential buyers more flexibility.

Essentially, when you are covered by mortgage insurance, the bank is able to make a claim to recover the money it lent to you. This greatly mitigates the risk to the bank when you go to take out your first mortgage.

Who is mortgage insurance for?

It affects you if you are planning to buy a single-family home, a condominium, a manufactured or mobile home, a duplex, etc. and you have between 5% and 19% of the cost of the home to put down. However, there is a ceiling on how high the purchase price can be if you need mortgage insurance. The maximum value or price of the property must be below $1,000,000.

What are the advantages?

You can’t just look at the insurance premiums you’ll pay; you need to think long term. Borrowing conditions and interest rates! Essentially, thanks to mortgage insurance, the risks to lending establishments are reduced. As a result, financial institutions are able to offer better borrowing conditions and more advantageous interest rates. Without this obligation, they would have no choice but to calculate and include the cost of the risk of lending to a buyer without a down payment of 20%, which would result in higher rates… And possibly to you needing to push back the project of buying your dream house.

Who offers mortgage insurance?

In Canada, the main supplier of mortgage insurance is the Canada Mortgage and Housing Corporation (CMHC), a parapublic entity. However, this type of insurance is also offered by private lenders, like Genworth Canada and the Canada Guaranty Mortgage Insurance Company.

What happens if you already have mortgage insurance and you buy a new property?

It’s not uncommon for a first-time buyer to decide to buy another property after a few years. Your family might be growing, or maybe your office moved or you’re itching to get into the real estate market… Whatever the reason, it’s highly likely that a new mortgage will be in order. But what should a buyer do if they already have mortgage insurance on their current home?

In most cases, private lenders will give you the opportunity to transfer your premium. For example, those dealing with the CHMC have access to a portability feature that can allow borrowers to save on premiums or even see them eliminated altogether.

In conclusion, mortgage insurance is an excellent way to become a homeowner, and at a reasonable cost. If you fixate on the cost of premiums, it’s important to remember that an additional year of renting represents months of rent lining someone else’s pockets rather than paying off a home that belongs to you. Run the numbers and don’t hesitate to ask an advisor for help.

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