Canadians who cannot come up with the 20 per cent down payment required to qualify for a conventional mortgage have to pay mortgage loan insurance in order to be eligible for a mortgage.
The Canada Mortgage and Housing Corporation (CMHC) provides the mortgage loan insurance, which essentially protects your bank from you. This means that if for some reason you can't make your mortgage payments, and the bank can't get all its money back after it has sold your property, the insurance will cover the rest.
How mortgage loan insurance can help youâ€¨
Scott Dawson, a mortgage broker with Verico Paragon Pacific Mortgages, believes that while mortgage insurance is put in place to protect the bank, it also benefits potential homeowners.
"Many purchasers, especially first-time buyers, may have difficulty saving a 20 per cent down payment," he says. "Mortgage insurance allows borrowers to get into a home sooner with a minimum down payment of only five per cent."
How mortgage loan insurance worksâ€¨
Mortgage loan insurance generally ranges from 0.5 to 2.9 per cent of the total mortgage amount. The rate is dependent on how much money you have for a down payment -- the more money you put down, the less you will have to pay. For example, a five per cent down payment means you will have to fork over 2.9 per cent for mortgage loan insurance, while with a 15 per cent down payment you will only have to pay two per cent.
How to qualify for mortgage loan insurance
The following conditions must be met for you to qualify for mortgage loan insurance through the CMHC.
- The home must be located in Canada.
- You must have a down payment of at least five per cent of the price of a single-family or two-unit dwelling (or at least 10 per cent for a three- or four-unit dwelling).
- Your total monthly housing costs should not exceed 32 per cent of your gross household income.
- Your total debt load should not be more than 40 per cent of your gross household income.
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How to pay less mortgage loan insuranceâ€¨
Buyers who have steady, full-time jobs will most likely have a lower insurance premium than those who own their own businesses, or are self-employed. For example, a buyer with a stable job who puts $50,000 down on a $500,000 house (10 per cent) would pay a $9,000 premium for insurance. But if that buyer were self-employed without any income validation, with that same $50,000 down payment, the payable premium would be $21,375.
Additionally, buyers who choose a 30-year amortization will pay an additional 0.2 per cent to the insurance premium. For instance, on a $100,000 home with five per cent down and a traditional 25-year mortgage, you would pay $2,612.50 as a premium. With a 30-year mortgage, you would pay $2,802.50.
For those striving to live a more sustainable and green lifestyle, if you are purchasing an energy-efficient home or make energy-saving renovations, you could be eligible for a 10 per cent refund on your CMHC mortgage loan insurance. You could also have the added flexibility of extending your amortization to the maximum of 30 years without a premium surcharge.
"The rebate for energy-efficient homes is an underutilized option, and something more home buyers will be able to take advantage of, as builders begin offering more energy-efficient developments," says Dawson. "This is a great incentive that will allow you to save money, and help the earth."
Is mortgage loan insurance worth the cost?
For many first-time home buyers, paying the mortgage loan insurance might seem worth the cost, compared to the idea of potentially never owning a home. However, while the mortgage insurance can be paid in cash, most borrowers elect to blend the premium into their mortgage payments, allowing them to pay the amount over the life of the mortgage. It makes the payment easier to swallow, but will end up costing much more over the life of the mortgage, once interest over 25 or 30 years is calculated.
"Historically low interest rates and the ability to meet the minimum five per cent down payment doesn't mean that everyone should enter the housing market," cautions Dawson. "It's important to have a budget and make sure that home ownership is right for you."
Krystal Yee is a marketing professional living in Vancouver. She writes about personal finance at Give Me Back My Five Bucks, and the Toronto Star's Moneyville.ca. You can reach her on Twitter (@krystalatwork), or by email at firstname.lastname@example.org.
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