High Ratio Mortgages and Default Mortgage Insurance

Buying your first home is a big step, one that requires a lot of planning and preparation. It’s important that you understand all the requirements and legal implications associated with buying a house before you sign your mortgage agreement.

Before choosing your first home it’s a good idea to understand your financial situation and your budget. This will help you grasp your real capabilities in regards to financing your first house. Upon completion of your budget, the amount of available money you have for a down payment should be an adequate indicator to help guide your mortgage research.

This article will help you understanding the mortgage options you have available to you in relation to your down payment capabilities.

Interested in information concerning your mortgage payment plan options? Read this article. 

 A Conventional Mortgage

A conventional mortgage is considered a mortgage in which at least 20% of the value has been given as down payment. This is a mortgage in its simplest form; it does not require any form of mortgage insurance. Because many housing markets in Canada are currently experiencing high prices, it is becoming more and more difficult for many Canadians to acquire a conventional mortgage.

Here’s a more detailed example. Let’s say that after an extended period of preparation and budgeting, you have calculated that you have $20,000 in cash for a down payment. As per the 20% basic down payment you may be eligible for a mortgage of $100,000.

According to the Canadian Real-Estate association, in 2020, the average cost of a house in Canada is about $488, 203. For this average cost, the conventional down payment required is 20% of $488, 203, which is $97,640. Unfortunately, many new home buyers do not have this amount of available money to purchase their first home. This is why a second option is offered to Canadians, in which, a minimum of 5% of the home equity is required for a down payment.

It is important to note that $488, 203 is the national average. Depending on your province of residence, the average cost may be quite different. For more pertinent information on the average cost of housing in your province, please refer to the table below.

High-Ratio Mortgage

A high ratio mortgage, an affordable option for many Canadians, is a mortgage in which only a minimum of 5% of the total cost of the house is required as a down payment. But because this becomes a riskier investment for lenders, legally, borrowers must qualify for mortgage default insurance. This insurance protects the lender in case a borrower defaults. It also allows borrowers to get the same interest rates as in a conventional mortgage but with a lower down payment.

Default Mortgage Insurance

Default mortgage insurance is typically the best solution for new home owners who have a stable income and good credit but do not have enough money for a large down payment. Default mortgage insurance allows lenders to offer lower interest rates because the risk is taken on by the insurer, not the lender. If this type of insurance was not legally demanded, many new home buyers wouldn’t be able to get a mortgage or would have very high interest rates.

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How Does it Work?

Depending on what percentage of the total cost of your mortgage you’re able to put down, you will be charged an insurance premium. Specific information about the borrower is also taken into account when calculating the premium. Employment and credit score will affect your eligibility. The total value of the premium or fee can be paid off at the closing of your loan agreement but is generally spread into your payment plan. It is calculated as a percentage of your mortgage agreement. The bigger your down payment is the smaller the premium. Here are some examples of home insurances premiums:

• For a down payment of 5% to 9.99% of the total value of your mortgage, the required premium will be 3.6% of the home value.
• For a down payment of 10% to 14.99%, the required premium will be around 2.4% of the home value.
• For a down payment of 15% to 19.99% the required premium will be of 1.8 % of the home value.

For Manitoba, Quebec, and Ontario the premiums are subject to the provincial sales tax.

Where to Find This Insurance

In Canada, there are three different providers of high ratio mortgage insurance, Genworth, CMHC and Canada Guaranty. For specific information on the cost of the products these insurers offer, please visit their websites.

Save More or Go For it?

Deciding between taking on a high ratio mortgage and waiting is a difficult decision to make. What’s most important is that you are realistic about your current financial situation. Taking on a mortgage that you can’t afford (learn about being house poor here) is never a good idea but on the other hand putting your life on hold for years may not be the most lucrative idea. In the end, you need to make your decision based on your want and needs.