Buying your first home: Three steps to successful mortgage shopping

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Step 1: Know what you need and want in a mortgage

Mortgage default insurance

Mortgage default insurance (sometimes called mortgage loan insurance) protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.

You must pay for mortgage default insurance if your down payment is less than 20% of the purchase price of your home. This is called a high-ratio mortgage. Your mortgage costs will be higher if you need to get mortgage default insurance.

The maximum amortization period is 25 years for mortgages with mortgage default insurance.

Mortgage default insurance is only available for high-ratio mortgages if the purchase price of the home is less than $1 million.

If you can put at least 20% of the purchase price of your home as a down payment, you will have what is called a conventional mortgage. In this case, mortgage default insurance is generally not required. There are exceptions to this—for example, where your salary is not paid on a regular basis.

Who offers mortgage default insurance?

Mortgage default insurance is provided by insurers such as:

  • Canada Mortgage and Housing Corporation (CMHC)
  • Genworth Canada
  • Canada Guaranty Mortgage Insurance Company.

Your lender will make the arrangements for the mortgage default insurance if it is needed.

How much are the premiums?

The premium—that is, the cost of mortgage default insurance—will vary depending on the down payment: the bigger your down payment, the lower your mortgage default insurance premium. Usually, mortgage default insurance premiums vary from 0.6% to 3.85% of the borrowed amount.

The premium can be added to your mortgage loan and included in your mortgage payments, or you can pay for it upfront in a lump sum. If the premium is added to your mortgage, you will pay interest on it at the same interest rate you pay on the principal amount of your mortgage.

Some provinces apply provincial sales tax (PST) to mortgage default insurance premiums. Provincial taxes on premiums cannot be added to your mortgage loan. You must pay these taxes when your lender funds your mortgage.

Example: Mortgage default insurance premiums

Paula’s down payment of $35,000 is 17.5% of the $200,000 purchase price of the home. Because her down payment is less than 20%, she will need to get mortgage default insurance.

Assumptions:

  • Mortgage amount: $165,000
  • Premium is added to the mortgage amount
  • Insurance premium rate: 1.8%
  • Amortization period: 25 years
  • Interest rate: 5%
  • Payment frequency: Monthly

The mortgage default insurance premium will cost $165,000 x 1.8% = $2,970

The total mortgage loan would then be $165,000 + $2,970 = $167,970

In addition to the cost of the premium, Paula will have to pay more in interest charges because the mortgage default insurance will increase the amount of her mortgage loan. Over the amortization period, the mortgage default insurance would cost her an additional $2,212 in interest.

In total, Paula will pay an additional $5,182 because she did not save a down payment of 20%.

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