Down payments and mortgage insurance
The Bank of Canada Act prohibits lenders from lending more than 80% of a property’s fair market value. When a home purchaser is able to make a down payment equal to at least 20% of a home’s fair market value, they qualify for what’s known as a conventional mortgage. Such a mortgage agreement is arranged strictly between the lending institution and the home buyer, without any third party intervention.
Many people find it difficult to save such a large amount of cash. For some, it could take years to accumulate such a hefty down payment. Yet, we want the benefits that home ownership provides while we are young and raising our families. Enter, the Canadian Mortgage and Housing Corporation (CMHC). CMHC is a Crown corporation that insures high ratio mortgages for lenders. A high ratio mortgage is one where more than 80% of a property’s value is financed. Lenders are required by law to insure all high ratio mortgages. Mortgage insurance protects the lender in the event that the buyer defaults on the mortgage.
If you meet your lender’s credit approval criteria, you can purchase your next home with as little as 5% down and a CMHC insured mortgage for the balance.
When you apply for a high ratio mortgage, you or your lender will be charged a CMHC application fee of $235.00. In addition, you’ll also be charged a mortgage insurance premium that ranges from .5% to 7% of the mortgage amount. The amount varies based on the amount of the down payment, and the qualifications of the mortgage applicant. While a purchaser may choose to pay the insurance premium in advance, it is not required. Alternatively, it can be added to the mortgage and paid off as you pay for the home.
When you finance a property using a CMHC insured mortgage you are required to demonstrate your ability to provide the agreed upon down payment plus an additional amount of cash to cover closing costs. CMHC will want to ensure that you have access to funds equaling 1.5% of the purchase price to cover legal fees and other costs to close.
CMHC requires homebuyers to take a minimum mortgage term of 3 years. They want you to have a fixed payment while you’re getting established in your new home. Keep this in mind when determining a range of value in which to shop. In some cases a three-year mortgage will have a higher interest rate than a shorter term, thereby increasing your carrying costs, and reducing the amount that you qualify to borrow.