Buying property is a great investment for you and your family. But, it's an expensive commitment. Did you know some conventional loans need a 20% down payment?
Not everyone has the cash for a large down-payment. If you don't have enough there's another option. Mortgage insurance can make you appealing to mortgage lenders.
It's important to note that mortgage insurance protects the lender, not the homeowner. If you fail to pay your mortgage, the insurer pays the lender a percentage of the loss.
How much is mortgage insurance? It depends on the loan amount, your credit score, down payment, and term of the loan. Let's dig into the details to see if you need it to buy a home.
What Is Mortgage Insurance?
Mortgage loan insurance is different than home insurance. This insurance protects the mortgage, not the building.
Mortgage Insurance refers to the insurance policies that are tied to the whole mortgage process. Some are targeted at the lenders while other policies are for the borrowers. Others still are for the home.
In Canada, mortgage default insurance is mandatory when the down payment is between 5% and 19.99%. A 5% down-payment is smallest allowed in Canada.
That means mortgage insurance allows buyers to get a mortgage that covers up to 95% of the home's price. It also helps buyers get a decent interest rate despite a smaller down payment.
In fact, mortgage loan insurance helps keep the housing market in a stable position. It keeps mortgage funding possible during economic downturns. Consumers who have a hard time saving for a down payment can still buy a home.
Mortgage insurance makes it possible for more Canadians to buy homes. If it didn't exist mortgage rates would be higher. The risk of loan defaults would increase. The insurance protects lenders. It allows them to offer lower mortgage rates to consumers.
How Much Is Mortgage Insurance?
Your mortgage lender pays a premium on mortgage loan insurance. The lender passes the cost on to the buyer. The amount is a percentage between 2.80% to 4.00% of the mortgage. The lender provides the exact amount when you apply for a mortgage.
To qualify for mortgage insurance, the buyer must make a down payment. The home's sale price determines the down payment amount.
Here are the requirements for mortgage default insurance:
- A down payment of at least 5% for homes costing $500,000 or less.
- If the home is more than $500,000, a 5% down payment on the first $500,000 and 10% down on the remaining amount.
- Homes costing $1,000,000 or more aren't eligible for mortgage loan insurance. Requires a 20% down payment.
- 25 years is the longest amortization for insured mortgages
You have two options for paying the mortgage loan insurance. Pay it all at once, or add it to the mortgage and pay with your monthly installments.
You could go without mortgage insurance. But, you'll pay a higher interest rate and incur other fees. Many buyers find the cost of mortgage insurance is offset by lower interest rates.
Another way to lower the cost of mortgage loan insurance is to buy an energy efficient home. Let's review the possibility for energy efficiency refunds next.
Insurance Premium Refunds for Energy Efficient Homes
If you use mortgage loan insurance to finance an energy efficient home, you may be eligible for a refund. It could be up to 25% of the premium. The refund applies when you buy, build or renovate a green home.
Any home built with these standards is eligible for an insurance premium refund of 15%:
- ENERGY STAR(R) (National)
- Built Green(TM) (National)
- LEED Canada for Homes (National)
- GreenHouse(TM) (Ontario)
- GreenHome(TM) (Yukon)
- Novoclimat (Quebec)
- Power Smart for New Homes (Manitoba)
A home built with R-2000 standards qualifies for a 25% premium refund.
Homes not built under these standards can contact National Resources Canada for assessment. An energy advisor will determine if your home complies with energy guide requirements.
If you buy a home and make improvements, you may meet requirements for a Green Home premium refund. Have a Natural Resources Canada qualified energy advisor assess your home before improvements. The advisor must inspect your home again after the energy efficiency improvements.
Do You Need Mortgage Insurance?
Mortgage lenders know people with a financial investment don't default as often on loans. That's why a down payment is so important.
Yet, many potential home-buyers don't have the cash. First-time home buyers rarely have a 20% down payment. That's why most loans have lower down payments and mortgage loan insurance.
Before you get mortgage insurance, make sure you need it. Talk to several lenders to get the best insurance quote. Review all your options before you commit to a mortgage agreement.
Increase your down payment if possible. Can you wait until you save more for a higher down payment? If you put down 20% you end the need for mortgage insurance. At the very least, a bigger down payment reduces your monthly payments.
Different Types of Mortgage Loans
Conventional mortgage loans are popular, but other types are available. Review each kind to find the mortgage that best suits your situation and finances.
Banks and lenders offer a conventional mortgage that requires a 20% down payment.
A portable mortgage is transferable from one property to another. The mortgage holder doesn't have to re-qualify with the lender. There are restrictions, and not every lender offers portable mortgages.
High Ratio Mortgage
This mortgage lets you borrow over 80% of the property sale price. It needs mortgage insurance.
An assumable mortgage lets the buyer assume the mortgage when buying a property. Assumable mortgages allow buyers to skip the qualification process for a mortgage. Sellers avoid fees and penalties associated with closing out a mortgage.
Vendor Take-back Mortgage
A Vendor Take-back mortgage lets the buyer buy the property with the seller's help. The seller lends the buyer part of the sale price. This type of loan is popular when interest rates are high and the housing market is slow.
A blanket mortgage is for an entire property, like a condominium community. Each unit's owner pays their part of the mortgage. They must qualify for their part and get their own mortgage.
Who Provides Mortgage Loan Default Insurance?
Mortgage lenders demand mortgage loan insurance when a down payment is lower than 20%. The insurance reduces the risk for lenders. The insurance also makes it possible for more Canadians to buy homes.
There are three mortgage default insurance providers in Canada:
If you need loan insurance your lender contacts a provider to buy it. All three providers charge the same rates.
Does Mortgage Loan Insurance Only Apply to Single-family Residences?
Mortgage loan insurance is available for many property types:
- Single-family homes
- Mobile or manufactured homes
- Retirement and Nursing Homes
Talk to your mortgage lender. See if the property you want to buy qualifies for mortgage loan insurance.
Who Pays for the Insurance?
All insurance policies have premiums. Mortgage default insurance is no different. The lender transfers the insurance costs to the buyer. Most often it's financed through your mortgage. The insurance cost goes into the mortgage amount. It's paid over time.
You do have the option of paying the insurance up front. In that case, you need to have the total amount available before closing.
What Happens If You Refinance Your Mortgage?
If your home increases in value, refinancing to end loan insurance could make sense. Remember, the loan-to-value ratio must be 80% or less. If your home appreciates in value, or you make improvements, you could meet the ratio.
Be sure to consider the cost to refinance. There are re-appraisal and closing costs. Another option is to check your home equity. Find out if you qualify for a conventional loan to avoid insurance.
Mortgage insurance isn't ideal, yet it makes buying a home possible for many Canadians. Plus, the lower interest rates available with mortgage insurance save homebuyers money.
How to Reduce Your Mortgage Insurance Costs
The only way to reduce your insurance is to increase the percentage amount of your down payment. You can do this by increasing the money you put down or choosing to buy a less expensive house.
If you want to make a larger down payment, consider a gift from a family member. First-time buyers can make a withdrawal from a Registered Retirement Savings Plan (RRSP). The Canadian home buyers plan lets first-time buyers borrow up to $25,000 tax-free for a down payment.
When two first-time buyers buy a home together each can use $25,000 from RRSP for a total of $50,000. But, the HBP is a loan that must be repaid within 15 years.
Contact the Insurance Experts
If you have questions beyond how much is mortgage insurance, visit Insurdinary Blog. You'll find insightful information on home, health, dental, travel, and business insurance. We help consumers make informed decisions about financial services and products.