High Ratio Mortgages
When you need a mortgage that is more than 80% of the purchase price of your home, mortgage loan insurance is required. In Canada, mortgage insurance is provided by either CMHC, a crown corporation, Genworth Financial, or Canada Guaranty, Mortgage insurance protects the lender and, by law, most Canadian lending institutions require it.
Having mortgage loan insurance means that if you, the borrower; default on your mortgage, the lender is paid back by the insurer. With the risk of losing their money removed, lenders have the confidence to make mortgage loans up to 95% of the purchase price of the home. That means your down payment can be as little as 5% of the purchase price of the home.
How Much Does it Cost?
A premium will be applied. It depends on the amount of your mortgage in relation to your purchase price. The larger the down payment the less the premium. Although you are permitted to pay the premium upfront, most borrowers pay it back over the life of their mortgage by including it with their monthly payments.
Down Payment: Premium 5%: 2.75% 10%: 2.00% 15%: 1.75% 20%: 1.00%
Money-Saving Tips
• The decision to grant credit and the interest rate you can successfully negotiate will be strongly influenced by your past credit history. The best thing you can do is avoid debt as much as possible, always pay your bills on time, do not charge your credit limit up past 75% of what’s allowed, and the less you inquire for credit the better.
• Ask your lender for details in the trade-off between slightly higher payments and a shorter amortization. For some buyers with good budgeting skills, ask what the payments would be over a twenty-year amortization instead of twenty-five. In return for slightly higher payments, you could shave five years off your amortization, build equity in your home faster, and be well on your way to being mortgage-free sooner.
• Take advantage of any prepayment privileges your lender will allow. Treat your regular payment as a worst-case scenario in which it will take twenty-five years to pay off your mortgage. Any extra payments you make go directly into your pocket, because every dollar you pay over and above your regular payment goes directly to the principal. That means, whenever possible, a few hundred dollars here and there can quickly add up to a few thousand saved later on.
