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Buying Your First Home: Three Steps to Successful Mortgage Shopping
Step 1: Know what you need and want in a mortgage
- Down payment
- Down payment financing option: Home Buyers' Plan
- Mortgage payments: understanding interest versus principal
- Choosing an amortization period
- Choosing a mortgage term and type
- Understanding fixed and variable interest rates
- Frequency of payments
- Mortgage default insurance
- Other insurance options
- Mortgage option: Cash back
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 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.
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 in the situations where your salary is not paid on a regular basis.
Example:
Let's say Paula is considering buying a $200,000 home, and she can put $35,000 as a down payment. Paula's down payment is 17.5% of the purchase price of the home.
$35,000 ÷ $200,000 x 100 = 17.5%
Because Paula's down payment is less than 20% of the purchase price, she will need to pay mortgage default insurance.
Who offers mortgage default insurance?
Mortgage default insurance is provided by insurers such as
- Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial
- Canada Guaranty Mortgage Insurance Company.
Your lender will make the arrangements for your mortgage default insurance if you need it.
How much are the premiums?
The premium —that is, the cost of mortgage default insurance — will vary depending on the percentage you have as a down payment: the bigger your down payment, the lower your mortgage default insurance premium. Usually, mortgage default insurance premiums vary from 0.5% to 3% of the borrowed amount.
If you get an amortization period that is longer than 25 years, the premium will be higher.
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.
Lets assume that
- the premium is added to the mortgage of $165,000
- the insurance premium rate is 2%
- the mortgage will be amortized over 25 years
- the interest rate is 5%.
The mortgage default insurance premium will cost $165,000 x 2% = $3,300
The total mortgage loan would then be $165,000 + $3,300 = $168,300
In the above example, this mortgage default insurance would cost Paula $3,300 and would be added to the mortgage total. The monthly payment would increase from $960 to $979. Over the amortization period, the mortgage default insurance would cost her an additional $2,458 in interest.
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