What is Mortgage Insurance?
Mortgage insurance is a protection tool for lenders against the possibility of mortgage default. The need for mortgage insurance typically comes into play when home buyers make a down payment between 5% and 20% of the purchase price of their home.
This insurance by no means protects the buyer and is intended to be a protective tool for the lender. To obtain such security, lenders are required to pay an insurance premium which they will pass onto the buyer. This premium is equal to a percentage of the home purchase price financed by the mortgage, then either added to the mortgage or presented as a single lump-sum to be paid off by the home buyer.
Mortgage insurance is usually between 0.5 and 2.9 per cent of the total mortgage amount. Where the percentage sits on the spectrum is dependent on the down payment. The higher the down payment, the lower the mortgage insurance rate. As a result, it is imperative that you ensure you are balancing between how much you can afford as your down payment and how much insurance you are willing to commit to.
The primary factor that makes a mortgage insurance required is if a buyer is not able to get up to 20% of the home purchase price as down payment. This automatically makes mortgage insurance a requirement.
In general, to qualify for mortgage insurance, you need to have the following requirements:
- Home must be located in Canada
- 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).
- Monthly housing costs should not exceed 32 per cent of your gross household income.
- Total debt load should not be more than 40 per cent of your gross household income.
Benefits to the Buyer
As we saw in RateHub’s infographic on the mortgage market, many Canadian’s don’t even qualify for a mortgage anymore. To qualify, they will have to save an additional $25,000 which will take them another 3 1/2 years. Managing to come up with a 20% downpayment is totally out of the question.
What mortgage insurance allows is the possibility of making a down payment of as little as 5% and getting ownership of a significant capital asset, rather than never owning a home. Also, it is possible to put the mortgage insurance with the mortgage payments over the life of the mortgage. It is easier to manage and while home buyers will be paying more, they now have a major capital asset with them.
CMHC Mortgage Loan Insurance
The CMHC is one of Canada’s leaders in housing and mortgage services. They provide a range of tools such as calculators and flexible financing options to help first time home buyers and investors with the purchase of a property and the finances that revolve around that purchase.
The CMHC provides mortgage loan insurance to those who qualify among other services. Additionally, they offer an incentive which allows home buyers to reduce their mortgage loan insurance. By purchasing an energy-efficient home or by opting-in to do energy-saving renovations, the CMHC Green Home flexible financing option makes home buyers eligible for a 10% mortgage insurance premium refund in addition to an extended amortization without a premium surcharge.
Combining the benefit of a low down payment with the CMHC Green Home flexible financing option not only lets you have little financial outflow but also gives you an incentive to live greener, which could have other benefits, including energy savings and reduction of utilities.
Other Ways to Save
You can further reduce the mortgage insurance through two means. The first is by paying off your mortgage sooner. By reducing the overall length of your mortgage, you are reducing the number of payments for your insurance premium.
Overall, we are seeing Canadian’s paying off their mortgage faster. RateHub’s analysis of the Canadian mortgage market shows that Canadian’s are paying off their mortgage five year’s sooner, observed between the years of 2008 and 2012.
Additionally, being financially stable also helps. Income validation is a major factor that affects how much insurance premium you pay. An analysis put together by Canadian Living shows that an individual with a full-time job would pay a $9,000 premium after putting $50,000 down on a $500,000 house – a 10% down payment. The premium works out to be $21,375 for an individual making the same down payment as a self-employed buyer.
By opting-in to pay mortgage insurance on a potential purchase, first time home buyers open many doors, the biggest being the ability to pay as little as 5% down towards the purchase of a new home. On top of that, various financial incentives such as the CMHC’s Green Home flexible financing option allows home buyers to capitalize on the lower down payment, live a greener & cost effective lifestyle and be able to save money in the process.