A home is most often your biggest asset, both financially and emotionally. That’s why it’s important to consider how insurance might play into your purchase. While it’s beneficial to aim for 20% of the purchase price as your down payment, we know this isn’t always realistic. That’s where mortgage insurance swoops in to help those who might need a little extra help landing a property. Let’s find out how mortgage insurance might be valuable to you, as a buyer, and how to find out if you are eligible.
What is mortgage insurance?
Mortgage insurance, also known as CMHC insurance, protects the lender in the event that a buyer defaults on their mortgage payments. In Canada, it’s only a requirement if your down payment is between 5% and 19.99% on a home under $1 million dollars. A lower down payment means that your lender has taken on more risk and a higher ratio of your home’s value, and therefore uses the insurance as a way to limit their exposure to non-payments. This isn’t a bad thing though! In many cases, the option to purchase mortgage insurance allows more people to get in the housing market with less money down.
How much does mortgage insurance cost?
Mortgage insurance is calculated as a percentage of the loan in relation to the total dollar amount of your down payment. Based on CMHC premium rates, the amount of mortgage insurance you are paying will also vary.
Here’s an example:
Lisa is planning to purchase an $800,000 home and has made a down payment of 5% ($40,000). Therefore, her mortgage will be $760,000. With a CMHC premium of 4%, Lisa’s mortgage insurance will equate to $30,400 and be amortized over the lifetime of her mortgage.
Am I eligible for mortgage insurance?
There are a few requirements in place in order to qualify for mortgage insurance. CMHC has outlined the following criteria:
- The property must be located in Canada
- Buyer must have a credit score of 680 or above
- The down payment can come from savings, sale of a property, or a financial gift from a family member
- The maximum amortization period on your mortgage is 25 years
- Debt service ratio requirements: a gross debt service (GDS) less than 35% and a total debt service (TDS) ratio that is less than 42%
Can I avoid mortgage insurance?
As previously mentioned, the only way to avoid CMHC insurance is to have a down payment of 20% or more. Once you’ve found a home that’s within your budget, there are a few programs that you can take advantage of in order to reach your down payment goal. There is the First-Time Home Buyer Incentive – where the federal government offers 5% on the purchase price of resale properties or the Home Buyers’ Plan, which allows you to to withdraw up to $35,000 tax-free from a Registered Retirement Savings Plan (RRSP) to buy or build a home. Having access to government programs is a stepping stone toward homeownership.
Whatever your situation is, the opportunity to buy a home is within your reach! For a more accurate picture of your home affordability, we recommend getting pre-approved for a mortgage with Homewise in just five minutes here. You will be connected with one of our mortgage advisors who will walk you through the process from start to finish.
