Undoubtedly the hardest thing to do – especially for first time homeowners, is saving for their down payment. Historically this has been the case with most Canadian consumers, and to assist the consumer, the government introduced mortgage insurance to get more people into the housing market. Today, when less than 25% of the purchase price is put down (a high ratio mortgage), the lender will require the consumer to use mortgage insurance to protect them against any payment default.
Now that the lender is protected and has minimized their risk, they are more willing to lend up to 95% of the purchase price and in some cases up to 100%. What this means to today’s consumer that they can purchase a home with as little as 5% down in most cases and in some cases with no money down. This has made it easier for many new Canadians to realize their dreams of home ownership much faster and easier than previous years.
There are two companies in Canada that offer this type of insurance, Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial. CMHC is a government agency designed to assist homebuyers get into home ownership, while a newer entry into the market has been the privately owned Genworth. The policies of both of these companies are basically the same, and in order to qualify for mortgage loan insurance you need to meet certain conditions.
Here are a few of the main ones:
The home must be the consumer’s principal residence and located in Canada;
A down payment of at least 5% must be available, or if 100% financing is needed the consumer must further qualify for this option;
Home expenses must not be greater than 32% of the monthly household income, and
total monthly debts can’t be more than 40% of monthly income; and,
A further 1.5% of the purchase price must be available as closing costs.
The question of where the premium is set is based on the amount of money put down as a down payment. The simple rule is the greater the percentage that’s put down, the lower the premium. Premiums range from .5% on the low end to 2.75% at the top of the scale. This premium is a lump sum and is usually added to the mortgage.
A qualified mortgage professional can explain all of the details and costs of a high ratio mortgage. He or she will also go through all the options available to find out which is the best mortgage for any situation and potentially save thousands of dollars throughout the term of the mortgage.
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