Did you know that if you want to buy a home with a down payment of less than 20%, you will need mortgage default insurance? By Canadian law, banks can only provide financing to qualified homeowners with a down payment of at least 20% unless the mortgage is insured.
What is Mortgage Default Insurance?
Mortgage insurance protects your lender in case you ever “default” on the mortgage – in other words, if you fail to make your payments. It’s important to note that this type of insurance won’t protect you as the borrower, although it does provide you with some benefits that we will discuss later on. The purpose of this kind of insurance is to lower the level of risk to your lender by providing them with assurance if you can’t keep up with your payments.
Your mortgage insurance premium will be added to the total sum of your mortgage and can be paid in monthly instalments along with your standard mortgage payment.
What are the benefits of Mortgage Insurance?
By taking out mortgage insurance, you can put as little as 5% down and get a mortgage for up to 95% of the purchase price of your home. This can make purchasing a home much more accessible as your down payment is that much smaller. With the average income not rising in line with the cost of homes, it can take people years to save up the 20% down payment that is typically needed. Mortgage insurance lets you buy a home with as little as 5% down so you can get on the property ladder and start building equity as a homeowner.
Mortgage loan insurance also helps to stabilize the market in slow economic times, as it helps ensure mortgages are available to potential home buyers. It lowers the risk of lending for banks, and helps borrowers buy homes they wouldn’t qualify for otherwise if they needed a higher downpayment.
In addition, it also helps ensure borrowers get a competitive interest rate on their mortgages. High-ratio mortgages, which are mortgages with mortgage insurance, often get better rates than uninsured mortgages as there is a level of assurance for the lender.
What do I need to qualify?
To qualify for mortgage insurance in Canada, you will need:
A credit score of 680 or above.
A gross debt service ratio (GDS) less than 35% and a total debt service ratio (TDS) that is less than 42%.
To be buying a home located in Canada that costs less than $1 million.
To choose a mortgage with a maximum amortization period of 25 years.
Your down payment can not come from borrowed funds, but gifts from family are allowed. The minimum down payment you can have will vary based on the purchase price of your home.
For homes $500,000 or less, a 5% down payment is required
For homes $500,000 – $999,999, you’ll need to put 5% down for the first $500,000 and 10% for the remaining purchase price.
Homes that cost $1 million or more require a 20% down payment and are not eligible for mortgage loan insurance.
As always, if you have any questions, please feel free to give us a call. We are always more than happy to help.