For home buyers capable of putting at least 20% down toward the value of a home, a conventional mortgage is possible through Canadian lenders. If you find yourself among those who do not have that kind of cash to put down right away, a high-ratio mortgage can be entered into. High-ratio mortgages involve a down payment of anywhere between 5% and 19.99% of the home’s total value. The trade-off for being allowed a mortgage under these circumstances is that the buyer must purchase mortgage insurance.
Mortgage insurance does not serve to protect the borrower, but rather the lender, in the event of default. Because high-ratio mortgages are inherently perceived to be higher in risk, mortgage insurance is necessary in these cases. It safeguards the lender and helps prospective homeowners get into a space of their own with a smaller down payment.
In this article, we’ll explain the ins and outs of mortgage insurance, including the cost and the agencies that provide this type of insurance to Canadian borrowers.
Who Provides Mortgage Insurance?
In Canada, there are three agencies responsible for insuring high-ratio mortgages:
- CMHC
- Canada Guaranty
- Genworth
Each agency provides high-ratio mortgage insurance. The premiums for this insurance must be paid at the time of advancement for the mortgage itself. The amount that you can expect to pay toward this premium will depend on how large of a percentage toward the home’s value you were able to put down in the first place. Generally, home buyers will pay 2.8% to 4% of the mortgage’s amount toward mortgage insurance.
What are the Requirements for Insuring a Mortgage?
If a home costs between $500,000 and $999,999, the down payment requirement to acquire an insured mortgage will increase. There is a minimum down payment of 5% on the first $500,000, and then an additional 10% of the amount that remains. If the home costs less than $500,000, then there is only the 5% minimum down payment to worry about.
Should the home cost $1 million or more, a high-ratio mortgage is strictly out of the question. A conventional mortgage only applies, so you must have a down payment of at least 20%.
Insured mortgages have a shorter amortization period, of 25 years maximum.
If you are looking to get a mortgage but don’t have the resources to pull together a 20% down payment, a high-ratio mortgage could be the solution you’ve been looking for.