In your mind, the house is perfect, the living room is already furnished and the views are sublime. There's only one catch: Even after scrimping and saving, you could be stretching to make the down payment. Lucky for you, the Canadian Bank Act allows first-time homebuyers to borrow up to 95 per cent of the purchase price, as long as they have mortgage loan insurance.
What is mortgage loan insurance?
It's a guarantee to the lender that, should you default on your mortgage, the lender won't be on the hook for the balance of the purchase price. If you have less than a 20 per cent deposit, the federal government requires that lenders insure your mortgage through one of three companies: Canada Mortgage and Housing Corporation (CMHC), which is government owned and guarantees coverage to 100 per cent, Genworth Financial or Canada Guaranty (both of which are mandated to cover only 90 per cent). The lender typically passes the cost on to the homebuyer.
What's the cost?
That depends on the price of the home and how much you're putting down. For example, if a two-bedroom walk-up costs $250,000 and you're putting down $12,500 (five per cent) on a 35-year mortgage, the CMHC loan insurance will cost around $7,500. "You can pay it up front," says Lois Volk, a mortgage broker with Invis in Toronto, "but usually, you're only putting down five per cent for a reason." Most homebuyers opt to have the cost blended in with their mortgage payments. The premiums for a 95 per cent mortgage start at 2.75 per cent of the loan value and rise slightly depending on the length of the term.
Can I buy it even if it's not required?
Yes. People sometimes opt to pay a smaller down payment and take the mortgage insurance. "People often want to keep a bit of cash for major repairs or household emergencies, or to help with furnishings," says Volk.
What's in the fine print?
The insurance is subject to PST (but not HST). Premiums are higher for self-employed applicants who do not have their annual income verified by a third party. And if you buy a second home, only the amount exceeding your first mortgage has to be insured. You'll pay a higher premium, so if it's a significantly larger mortgage, it's often cheaper to reinsure the entire amount, says Volk.
What is mortgage life insurance?
Your lender will typically ask if you'd like this insurance as well. She may even require you to sign a waiver should you decline. Don't sweat it: This is an optional product designed to pay off the balance of your home should you die. If you already have an individual life insurance policy, chances are you don't need it. If your down payment on your new home is less than 20 per cent of the purchase price, you are required to buy mortgage loan insurance.
David Fielding is a former editor at Report on Business magazine and owns as many houses as he can afford: one.
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