Many people would love to buy a home, but don't have the 20% down payment needed for a conventional mortgage. But there's good news. Home ownership may still be within reach. That's because you may be able to buy a home for as little as 5% down if you also buy mortgage default insurance.
What is mortgage default insurance?
Mortgage default insurance protects your lender if you default on the loan. One reason you need to buy this insurance is if you have a high-ratio mortgageOpens a popup. — your down payment is less than 20% of the property value. Currently, it’s not available for homes with a purchase price of over $1 million.
If you default on your mortgage, your lender can start proceedings to sell or take over your property. The insurance covers your lender's losses after the property sells.
How is mortgage default insurance arranged?
Your lender arranges this insurance through Canada Mortgage and Housing Corporation (CMHC) or another mortgage insurance company. Your lender pays the premium directly to the mortgage insurer and adds it to your mortgage principal. You pay it back to the lender, with interest, as a part of your mortgage.
You can pay the insurance premium in a lump sum when your mortgage closes, to keep it separate from the mortgage principal. But since it can be a large amount, many people just add it to the principal and pay it back over time.
What are the typical mortgage default insurance premiums?
Premiums can range from 0.6% to 4.5% of the mortgage principal, depending on the size of the mortgage, the down payment amount and the amortization periodOpens a popup..
What factors affect mortgage default insurance premiums?
- The size of your mortgage: The lower your mortgage, the lower the premium
- Your employment status: Self-employed buyers pay a higher premium than regular applicants because third party employers can't validate their income. Also, business owners make a minimum 10% down payment on their home, not 5% like regular buyers
- Source of your down payment: Non-traditional sources like borrowed funds, gifts and 100% sweat equity increase premiums by about 0.5%
Can I refinance an insured mortgage or transfer it to another lender?
This depends on the terms of the mortgage. Also, you need the approval of your existing lender and, for a transfer, the approval of the new lender. A Mortgage Advisor can help you through this process step by step.