Last July 2018, home buyers spent an average of $481,500 to finally become homeowners. That represents a 1% increase from last year's average house price.
With that kind of money, you'd think you can get at least a 3-bedroom house, right? But no. Especially if you buy a home in Vancouver, where your $500K can only get you a one-bedroom house on average.
What's more, there's also the added cost of upfront mortgage insurance premium to think of! Depending on several factors, that can raise your total mortgage costs by an easy $15K.
The good news is, that $15K doesn't have to be necessary. Mortgage insurance doesn't have to be that big of a burden, in fact. With the right strategies, you can make this insurance product work for and not against you.
How exactly do you do that though? We've rounded up nine ways, so feel free to use as many of them as possible!
1. Understand What Upfront Mortgage Insurance Premium Is All About
Understanding the whats and whys of mortgage insurance is key to saving on it. So, let's start this list by explaining the basics of this insurance product.
What Mortgage Insurance Is
In Canada, this is also often referred to as mortgage default insurance or CHMC insurance. CHMC stands for Canada Mortgage and Housing Corporation. Although not all mortgage insurance policies are from CHMC, most of them are.
Either way, these insurance products exist to protect lenders in case borrowers default. You read that right - the one protected is the lender and not the borrower. If you default on your mortgage, the insurance kicks in so the lender can get back the money you still owe them.
By the way, it's not the same as mortgage protection insurance. MPI is like a life insurance policy, wherein you're the one insured.
Why You'd Need One
It's not completely without benefits for the borrowers though. First off, it allows home buyers who can't make a down payment of at least 20% to become homeowners. In other words, mortgage insurance is a must for buyers who can't make the 20% cut.
But if they qualify for this insurance, they can finally take that step to home ownership. Like the half of first-time young buyers who now have a home even though they put down less than 20%.
With this insurance, you may still qualify for a mortgage even if you're too far from having that 20% down payment. It makes home ownership possible sooner, so you don't have to deplete your savings too. In fact, it lets you buy a home with as little as 5% down payment saved.
But this still doesn't mean you should go right ahead and take the leap to homeownership. Nor does it mean you should take the first mortgage offer even if you qualify for mortgage insurance. Because at the end of the day, it still makes home ownership cost pricier than it already is.
2. Save Enough to Make a 20% Down Payment
Since you can avoid mortgage insurance, then why not do what you can to not have to deal with it in the first place? Remember, you'd only need this type of insurance if you can't make a 20% down payment. If buying a home can still wait so you can save more for a down, consider that route.
3. Save What You Can for a Bigger Down Payment
Say you're 100% sure you want to buy a home ASAP even if you're short on that 20% down payment. In that case, save up as much as you can to get as close to that benchmark as possible. Because the bigger your down payment, the less you'll pay for mortgage insurance.
This has become even more apparent now, what with CHMC's recent hike on its standard premiums. Note that even Genworth Canada now also has higher mortgage insurance standard premiums.
So, how much can you save on your monthly PMI with a bigger down payment? Let's take a closer look.
- Down payment of 15% to 19.99% - Standard insurance premium of 2.8% (from 1.8%)
- Down payment of 10% to 14.99% - Standard insurance premium now at 3.1% (from 2.4%)
- Down payment of 5% to 9.99% - Now comes with a standard insurance premium of 4% (from 3.6%)
This tells you that the smaller the amount you put down, the higher your insurance charges. On top of that, a smaller down payment also means borrowing a bigger amount of money. That means you also have higher mortgage payments to think of.
That said, try to wait for a bit longer until you can get to the least premium possible. That way, you can save both on mortgage insurance and mortgage payments.
4. Make Sure Your Insurer Has the UMIP Set for Automatic Cancellation
The Canadian law requires mortgage insurers to cancel the policy once you have a 22% equity on the home. This means your outstanding loan has fallen to only 78% of its original value. It's a law that often applies to a buyer-paid mortgage insurance (BPMI).
But being a legal requirement doesn't always mean that insurers always cancel it. So, it's always a good idea to contact them to make sure they stop charging you once you reach this "milestone".
5. Drop as Much of Your Mortgage as Possible
Speaking of automatic BPMI cancellations, you may also have the option to cancel it early. That's by paying down your mortgage as much as you can.
Let's say you already have 20% equity on your home. You only need 2% to get the mortgage insurance canceled, right? So, if you have the money now, you may want to pay off that remaining 2%.
6. If Possible, Go for a Shorter Amortization Period
Reducing your amortization period may also be a cost-saving option. In general, the longer this period is, the higher risks the lender faces. As such, this often means higher insurance premiums too.
Remember, most of the time, higher risks equate to higher charges. So, a shorter amortization may be a deal breaker on your mortgage insurance.
7. Compare Your BPMI and LPMI Options
The lender paid mortgage insurance is another common mortgage insurance type. As the term suggests, the lender takes responsibility for "paying" the insurance. But, they do so for a fee.
If you opt for LPMI, you won't have to buy a separate mortgage insurance policy. You'll see this in the form of a higher mortgage rate from your lender. The higher rate lets them cover your mortgage insurance payments.
Sometimes though, LPMI can lower your total mortgage payments. So, before you get a BPMI, compare these two options first. That way, you can figure out which one will give you the most savings.
Keep in mind that LPMI isn't cancellable though. That's because the insurer adds the insurance premium into your interest rate. So, even if you've reached 22% equity, you'll still pay the same interest rate.
In many cases, home buyers opt for LPMI because they'll stay in the house only for up to 10 years. If this is your plan and you have every intention to stick to it, consider this option.
8. Consider Buying a Lower-Priced House
The lower the cost of buying a house, the greater the value your down payment carries. That can then bring your mortgage insurance costs down. Plus, it also allows you to borrow less from a lender.
Let's say you've saved up $50,000 for a down payment. That's equivalent to a 10% down payment on a $500,000-priced house. Your total mortgage would then amount to $450,000.
From the cited premiums above, that means you'll fall in the 3.1% category. As such, your mortgage insurance premiums will total to $13,950. All in all, your mortgage amount comes up to $463,950.
If you were to put that money down for a $400,000-priced house, that's a 12.5% down payment. You're still within the 3.1% category, but your premiums will only add up to $10,850. That means your mortgage will cost you a total of $360,850.
Now, that $3,100 difference may seem like a small amount. But that's still $3,100 more than the 32% of near-retirement Canadians who don't even have any savings! That's also more than what 24% of surveyed Canadians have, or rather, not have set aside.
Granted, this means you have to compromise and keep house-hunting longer. But it may still be the best for you since you don't want to be a homeowner but without anything saved up.
9. Consider Upgrades That Make Your Home a Greener Dwelling
Mortgage insurance incentives are available to green homeowners. This applies to homebuyers who take out a mortgage to buy an energy-efficient home. The same goes true for those who make energy-efficient home updates and upgrades.
So, be sure to check out these offers to get a rebate or discount on your mortgage insurance!
To Buy Now or to Buy Later
Before you buy a house, think of your down payment. Again, less than 20% means paying for upfront mortgage insurance premium too. But, the choice is still completely up to you.
If you want to buy now, by all means, go ahead. But, make sure that you explore all your options when it comes to mortgage insurance. That way, it won't be that big of a burden and take away the joy of home ownership.
Still curious about mortgage insurance? Then we've got more related tips on our blog you should check out!