High Ratio Mortgages and Default Mortgage Insurance

Buying your first home is an important step, which requires a lot of planning and preparation. You must understand all the legal requirements and implications associated with buying a home before signing your mortgage agreement. Before choosing your first home, it’s a good idea to understand your financial situation as well as your budget. This will help you assess your real abilities in financing your first home. Once your budget is finalized, the amount of money you have available for a down payment should be an adequate indicator to help guide your mortgage research. This article will help you understand the mortgage options you have available in connection with your payment capabilities.

A conventional mortgage

Image result for conventional mortgageA conventional mortgage is considered a mortgage for which at least 20% of the value of the property has been given as down payment. This is a mortgage in its simplest form; it does not require any form of mortgage insurance. Since many real estate markets in Canada are currently experiencing high prices, it is becoming increasingly difficult for many Canadians to acquire a conventional mortgage.

Here is a detailed example:

Say after a long period of preparation and budgeting, you calculated that you have $ 20,000 in cash for a down payment. Depending on the 20% down payment, you may qualify for a $ 100,000 mortgage. According to the Canadian Real Estate Association, the average cost of a house in Canada was approximately $ 503,301 in 2016. For this average cost, the required standard deposit is 20% of $ 503,301, or 100,660 $. Unfortunately, many new homebuyers do not have this amount of money available to buy their first home. That’s why a second option is available to Canadians, in which a minimum of 5% of the equity value of the property is required for a down payment. Know that $ 503,301 is the national average. Depending on your province of residence, the average cost may be very different. For more information on the average cost of housing in your province, please see the table below.

provinces Average price of the accommodation
Alberta $ 397.269
British Columbia $ 694.925
Manitoba $ 284.798
New Brunswick $ 170.044
Newfoundland and Labrador $ 270.664
New Scotland $ 226.272
Ontario $ 554.009
Prince Edward Island $ 192.115
Quebec $ 287.637
Saskatchewan $ 297.837

High Ratio Mortgage

 High Ratio Mortgage

The high ratio mortgage, which is an affordable option for many Canadians, is a mortgage for which only a minimum of 5% of the total cost of the home is needed as a down payment. However, since this is a risky investment for lenders, by law, borrowers must qualify for default mortgage insurance. This insurance protects the lender in the event of default on the part of the borrower. It also allows borrowers to obtain the same interest rates as for a conventional mortgage but with a lower down payment.

Default mortgage insurance

Default mortgage insurance is usually the best option for new home owners who have a stable income and good credit, but do not have enough money for a large down payment. Default mortgage insurance allows lenders to offer lower interest rates because the risk is borne by the insurer and not the lender. If this type of insurance was not legally required, many new homebuyers would not be able to get a mortgage loan or would have very high interest rates.

How does it work?

You will be charged an insurance premium based on the percentage you can pay for the total cost of your mortgage. Specific information about the borrower is also taken into account when calculating the premium. The evaluation of employment and credit affects your eligibility. The total value of the premium or fees can be refunded at the close of your loan contract, but is usually split into your payment plan. It is calculated as a percentage of your mortgage contract. The higher your down payment, the lower the premium. Here are some examples of mortgage insurance premiums:

  • For a down payment of 5% to 9.99% of the total value of your mortgage, the premium required will be 3.6% of the value of the home.
  • For a deposit of 10% to 14.99%, the required premium will be approximately 2.4% of the value of the house.
  • For a deposit of 15% to 19.99%, the required premium will be 1.8% of the value of the house.

For Manitoba, Quebec and Ontario, premiums are subject to provincial sales tax.

How to find this insurance?

In Canada, there are three high ratio mortgage providers: Genworth, CMHC and Canada Guaranty. For more information on the cost of these products, please visit their websites.

Save more or get started?

Making the decision to go to a high ratio mortgage or waiting for more savings may seem difficult. Most importantly, you are realistic about your current financial situation. Taking a mortgage that you can not repay is not a good idea, but putting your life on hold for a few years is no better. In the end, you must make your decision based on your needs.