Getting on the property ladder these days can seem like a distant dream for many Canadians. But with the help of mortgage insurance – and perhaps government incentives for first-time homebuyers – it’s possible to get on the housing market with a down payment as low as 5%.
Learn what mortgage insurance is, why you might need to pay it, how much it’ll cost you and more in our guide below.
What is mortgage loan insurance – and why is it charged?
Mortgage insurance, also commonly known as CMHC insurance or default insurance, is an additional charge that you’ll take on as a homebuyer if you provide a down payment of less than 20% of the purchase price of your property. While this insurance is in place to help Canadians get on the property market faster and with a lower down payment, mortgage insurance ultimately protects the lender in the case that a borrower stops making payments and defaults on their mortgage. Mortgage insurance also helps keep interest rates low, because the risk of defaulting on a mortgage is transferred to the lender when this insurance is involved.
You might wonder why you’d pay the extra charge of mortgage insurance when you can easily avoid it by providing a down payment of at least 20%, but there’s one simple reason: it helps homebuyers get on the market without saving up such a high down payment. If mortgage insurance didn’t exist, you’d be looking at paying $20,000 for every $100,000 you spend on a home.
When is mortgage insurance charged?
If you provide a down payment of less than 20% of the purchase price of your new home, you’ll be charged mortgage insurance. This is required by law, so if you’re looking to avoid the additional cost, you’ll need to put at least 20% down.
Mortgage insurance eligibility requirements
To be eligible for an insured mortgage, you’ll need to meet the following requirements:
Keep your mortgage amortization period to 25 years or less.
Ensure your home’s purchase price is less than $1 million.
Meet the minimum down payment rules outlined below for any down payment less than 20%.
Minimum down payment rules
If the purchase price of a property is less than $500,000, the minimum down payment is 5%.
If the purchase price is between $500,000 – $999,999, the minimum down payment is 5% on the first $500,000 and 10% on any amount over $500,000.
If the purchase price is $1,000,000 or more, the minimum down payment is 20%.
The cost of mortgage insurance will be anywhere from 2.80% to 4% of your mortgage amount. While the cost of your mortgage insurance mainly depends on the amount of down payment you provide, the type of mortgage you have can also affect the rate of interest.
As of September 2019, the rates charged by the three mortgage insurers – CMHC, Genworth and Canada Guaranty – are as follows:
Down payment amount
5% – 9.99%
10% – 14.99%
15% – 19.99%
No insurance required
How do I calculate how much mortgage insurance I’ll pay?
Here’s how to calculate how much you’ll pay for mortgage insurance:
Calculate your down payment as a percentage of your property’s purchase price.
Calculate your mortgage amount.
Calculate your insurance based on the down payment percentage your property falls into.
Here’s an example using the interest rates above. Let’s say you’re looking to buy a property valued at $400,000 and you’ve got a down payment of $40,000.
$40,000 down payment divided by the property value of $400,000 = 0.1 or 10% (down payment %)
$400,000 property value minus down payment of $40,000 = $360,000 (mortgage amount)
Since you’ve got a 10% down payment, you fall into the interest rate of 3.10%. $360,000 mortgage amount multiplied by 3.10% = $36,000 (cost of mortgage insurance)
Based on these calculations, you’d pay $36,000 for mortgage insurance. Keep in mind this is on top of the interest that you’ll pay on the borrowed amount of $360,000. So if your lender offers an interest rate of 3.5% amortized over 25 years on your mortgage of $360,000, you’d pay $179,211.96 in interest, as well as $36,000 in mortgage insurance, for a total of $215,211.96. As you can see, the cost of interest and insurance is almost two thirds of your original mortgage amount.
When is mortgage insurance a good idea – and when is it not?
When it’s a good idea:
You want to get on the housing market now before housing prices increase.
You have an almost 20% down payment.
You’ve got a good credit score and you’ll qualify for a competitive interest rate.
It’s an investment property and you plan to rent it out and have someone else pay the mortgage.
When it’s a bad idea:
You’re not sure if you’ll be able to afford your mortgage payments with the added insurance costs.
The property in question is out of your budget and you’ll be cash poor for a long time.
You’re looking to pay as little interest as possible on your mortgage.
You don’t have enough money to pay the PST on the mortgage insurance when the house closes.
How to get mortgage insurance
Although mortgage insurance is commonly referred to as CMHC insurance since the Canada Mortgage and Housing Corporation (CMHC) are a federal Crown corporation, there are actually two other private providers that offer mortgage insurance: Genworth Financial and Canada Guaranty.
The pros and cons of mortgage insurance
Helps Canadians get on the housing market much faster.
Can be paid in a lump sum or can be tacked onto monthly mortgage payments.
Keeps interest rates down, since less buyers will default on their mortgages.
Increases the cost of your mortgage by thousands of dollars.
Must pay PST on mortgage insurance when the house closes.
Maximum amortization period is 25 years for an insured mortgage.
If you can’t afford a 20% down payment on your property and you’re ready to get on the housing market, you’ll have to pay mortgage insurance. While this insurance will add thousands of dollars onto the cost of your mortgage, it could be worth paying if you’re able to get on the housing market faster.
Property insurance, also known as homeowners insurance, is the insurance you’ll need to protect your home against damage from disasters such as fire, floods, theft and more. This type of insurance is not required by law, however many lenders may require you to have it in order to be eligible for a mortgage.
Mortgage life insurance is designed to help you repay any outstanding mortgage debt should you pass away or face a long-term disability. This type of insurance is not required and is completely optional.
There are a couple of ways to avoid mortgage insurance altogether:
Provide a down payment of at least 20%.
Purchase a cheaper house where you can afford the 20% down payment.
If you’re looking to minimize the amount of insurance you’ll pay, try to provide as close to a 20% down payment as you can. This will lower the amount of interest you face over the life of your mortgage.
Aside from saving up for your down payment or asking family members to help you out, you can also withdraw up to $35,000 from your RRSP to pay all – or at least a portion – of your down payment. You will, however, need to pay this amount back within 15 years or else you’ll face tax repercussions.
Home Buyers Plan. You can now withdraw up to $35,000 from your RRSP and use it towards your down payment. You will, however, have to pay it back within 15 years of withdrawing.
First-Time Home Buyers (FTHB) tax credit. Claim up to $5,000 in tax credits on costs associated with purchasing your first home. Associated costs might include land transfer tax, legal fees or disbursements.
GST/HST New Housing Rebate. You can qualify for a rebate to recover part of your GST or HST payments that you paid on the purchase price, on the cost of renovating or adding additions, or on converting a non-residential property into a home.
First-Time Home Buyer Incentive. Eligible first-time homeowners who have a minimum down payment for an insured mortgage can apply to finance a small portion of their home through a shared equity mortgage with the Government of Canada.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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