You’ve found the perfect home and you’re ready to put in an offer, but your down payment will be less than 20% of the purchase price. Does this mean you can’t get approved for the mortgage? No, it doesn’t! It just means that you will need an insured mortgage. Let me explain this further.
Definition of Insured Mortgage
An insured mortgage may also be referred to as mortgage loan insurance, or simply mortgage insurance. If you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects the lender if you can’t make your payments.
In Canada, mortgage loan insurance is offered through the Canada Mortgage and Housing Corporation (CMHC). Your lender takes care of paying the insurance premiums to the CMHC, but the cost of the premiums are passed on to you as a percentage of your home’s purchase price and how much down payment you put down. The CMHC provides this helpful chart to help you determine the percentage you’ll pay.
Who Needs an Insured Mortgage?
If you are buying a house with less than a 20% down payment, you will need mortgage insurance. Your life stage, age or number of homes owned previously doesn’t affect the need for insurance. If you don’t meet the 20% threshold, you will be required to have an insured mortgage. To qualify, you will need to meet these criteria:
- The maximum amortization for insured mortgages is 25 years.
- If the purchase price is between $500,000 – $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.
- Mortgage loan insurance is not available on homes purchased for more than $1 million.
What are the benefits to an Insured Mortgage?
While it might not seem fair to have an insurance cost added to an already costly mortgage, there are some benefits to consider:
- Insured mortgages are typically subject to lower interest rates and administrative fees as the insurance coverage lowers the lender’s risk.
- Insurance allows Canadians to purchase homes, who might not otherwise have been able to afford it.
- Homeowners with energy efficient homes may qualify for a discount (up to 25%) on their CMHC premiums, reducing the financial impact of this insurance.
- Unlike closing costs, such as legal fees, mortgage insurance does not require a lump sum cash payment at the time you purchase your home. Instead, your premium is added to your mortgage amount and paid off over the life of your loan. So you aren’t out of pocket all at once for it, and you will barely notice the additional cost over the course of your mortgage.
Ready to jump into home ownership, but lacking the 20% down payment? I am here to answer all your questions about mortgage insurance, CMHC and how to get approved. Reach out to me today!