Understanding Mortgage Default Insurance
Most people don’t have the financial capacity to purchase a home outright. Therefore, it’s common practice to finance part of the home purchase and rely on a mortgage for the remaining amount. The initial upfront payment is known as the down payment. Calculating the down payment is straightforward with a first-time buyer calculator; simply input the home’s price and the required down payment percentage to determine your down payment amount.
Making the Minimum Down Payment
Traditionally, a 20% down payment was the norm for purchasing a new home. However, many lenders now accept smaller down payments if the buyer agrees to purchase mortgage loan insurance. In Canada, the minimum down payment for homes priced at $500,000 or less is 5%. For homes over $500,000 but under $1 million, the minimum down payment is 5% on the first $500,000 and 10% on the remaining balance. These smaller down payments, less than 20% of the home’s purchase price, are known as high-ratio mortgages. High-ratio mortgages are only available for homes priced at $1 million or less; otherwise, buyers must make a standard 20% down payment.
The Cost of High-Ratio Mortgages
High-ratio mortgages make homeownership more accessible by lowering the initial down payment requirement. However, this convenience comes with additional costs. To mitigate the risk of borrowers defaulting on their mortgage, lenders require buyers to pay for mortgage loan insurance, also known as mortgage default insurance.
What is a High-Ratio Down Payment?
A high-ratio mortgage refers to the significant difference between the down payment and the loan amount. Mortgage default insurance is calculated as a percentage of the loan amount and can be paid monthly or as a lump sum. These rates typically range from 1.8% to 4% of the mortgage amount. Higher loan-to-value ratios result in higher insurance premiums. By integrating mortgage default insurance into monthly mortgage payments, many buyers can afford to purchase a home sooner rather than saving up a 20% down payment.
Amortization Periods and Mortgage Insurance
The maximum amortization period for a high-ratio mortgage is 25 years. If you want a longer amortization period, you will need to make a conventional down payment of 20% or more. Mortgage default insurance in Canada is provided by three main institutions: the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Sagen.
Conclusion
Mortgage default insurance plays a crucial role in making homeownership more accessible to many Canadians. While it adds to the cost of buying a home, it enables buyers to purchase homes with smaller down payments and provides lenders with protection against default. Understanding the implications and costs associated with high-ratio mortgages and mortgage default insurance is essential for anyone looking to buy a home in Canada.
