Mortgage insurance is an extra premium applied to any mortgage purchased with 5% to 19.99% down payment. Also known as mortgage default insurance, mortgage loan insurance, or CMHC insurance, this premium helps to mitigate risks for lenders and helps home buyers who otherwise would not be able to purchase a property qualify for homeownership.
As you may have heard, new premiums for mortgage insurance will kick in on March 17, 2017. Check out our previous blog on the topic for a full description of the premium increases, which vary based on the down payment percentage. If you contribute over 20% down payment, you can avoid mortgage insurance altogether (on an Uninsured Conventional Mortgage).
With the increase in premiums, is it still worth taking on mortgage loan insurance? To help you get a better indication of what might be the right down payment for you, here are some pros and cons to consider when saving for a down payment:
The Conventional 20% Down Payment Mortgage
One of the biggest benefits of a 20% mortgage down payment is that you will avoid taking on a mortgage default insurance premium – a premium your lender requires you to have if you have a down payment of less than 20%. This protects your lender in case you default on your payments, and is arranged by your lender through CMHC.
These premiums can really add up over time and push your monthly mortgage payment rates up. To give you an idea, if you were to put down a 5% down payment on a $400,000 home today, you would rack up an insurance premium of approximately $16,000 at the new 4.0% premium rate. Though this premium will not break the bank when applied to your mortgage payment, adding only a few dollars each month, it is still $16,000 extra out of your pocket over the life of the mortgage.
Which brings us to smaller monthly mortgage payments. The more money you put down initially means you will need to borrow less to finance your home purchase. Your principal payments will be lower, and you will not need to pay any premium.
The 5%-19.99% Down Payment Backed by CMHC
With the hot real estate market that’s happening in many Canadian cities, the average annual housing prices are moving up, and fast. This can be good for people wanting to make an investment, but hard for people with little savings or start-up cash.
With a 5% down payment however, first-time homebuyers can enter the market much more quickly than if they needed to save 20% of the purchase price. For instance, you can now purchase a $300,000 starter house or condo with a $15,000, 5% down payment compared to the $60,000 required through a 20% down payment. However, you must also factor in the insurance premiums.
With the increased premiums, it may make sense to delay your home purchase and save up for a higher down payment. Either you can reduce the premium rate (higher premium rates apply to lower down payment percentages), or you can avoid insurance premium altogether by saving up for a 20% down payment. On the other hand, waiting to save up could actually cost you more if you factor in rising home prices.
Determining which down payment amount is right for you can be difficult. That’s why it is always best to talk to The Mortgage Advisors to determine the right mortgage solution for your financial picture. Contact us today to discuss what option makes the most sense for you.
There is still time to get your purchase in before March 17th 2017 before the premiums increase!