As we navigate changes in the housing market, it's crucial for homebuyers and real estate professionals to understand the fundamentals of insured mortgages in Canada. Insured mortgages are designed not to protect the buyer but rather the lender from the financial risks if the borrower defaults on mortgage payments.
Why Mortgage Insurance is Necessary
In Canada, mortgage insurance is required when a homebuyer makes a down payment of less than 20% of the home's purchase price. This means that buyers putting down as little as 5%, 10%, or 15% must secure mortgage insurance. Lower down payments pose a higher risk to lenders, and requiring insurance helps make these riskier loans viable, thereby widening the pool of potential homeowners. Here are some key rules and requirments courtesy of www.cleverlending.com
1. Minimum Down Payment Rules:
* Homes up to $500,000 require a minimum down payment of 5%.
* For homes between $500,000 and $999,999, the down payment is 5% on the first $500,000 and 10% on any amount above that.
* Currently the maximum purchase price for homes that require insurance is $1million. Starting December 15, insured mortgages will be allowed for homes valued up to $1.5 million.
2. Amortization
* Insured mortgages currently have a maximum amortization period of 25 years. This is also going to change on December 15th to 30 years but only for First Time Home Buyers.
3. Insurance Providers:
* There are three primary providers of mortgage insurance in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty.
4. Premium Costs:
* Mortgage insurance premiums are calculated based on the mortgage amount and decrease as the down payment increases. Premiums range from 4% for down payments of 5% to 10%, 3.1% for down payments of 10% to 15% and 2.8% for down payments of 15% to 20%.
* These costs are typically rolled into the mortgage payments rather than paid upfront.
5. Credit and Income Standards:
* Insured mortgages have stricter requirements for credit scores and debt servicing ratios compared to conventional mortgages, with maximum allowable ratios set at 39% for Gross Debt Service (GDS) and 44% for Total Debt Service (TDS).
Benefits of Insured Mortgages
The primary advantage of opting for an insured mortgage is the ability to purchase with a smaller down payment. There is however another small upside. Insured mortgages rates are usually the lowest available as these loans present less risk to lenders. This can make significant savings over the life of the mortgage, offering a more affordable pathway into home-ownership, especially for first-time buyers.
Summary
Insured mortgages open the door for many Canadians to buy a home with a smaller down payment. While this comes at the cost of mortgage insurance premiums, the benefits—such as lower interest rates and access to home-ownership—often outweigh the costs. As the landscape evolves with new regulations set to take effect, understanding these details is more important than ever for both buyers and real estate professionals.
CREDIT: https://www.cleverlending.com/mortgageminute/insuredmortgages