Mortgage Insurance
Ill-informed first-time buyers
often assume the position of "I'm
not going to buy a home until I
can save enough money to not have
to pay the mortgage insurance premium".
This type of thinking will keep
many a homebuyer out of the real
estate market for a long time. Let's
clarify what mortgage insurance is and why some homebuyers need
and should use it.
What is Mortgage Insurance?
According to Section 418 of the
Bank Act, if you're purchasing
a home and are borrowing more than
75% of the value of the property,
the mortgage must be insured. Mortgage
insurance protects the lender against
borrower default. This enables you
to purchase a home with as little
as a 5% down payment. The insurance
premium is paid once, at the time
of closing, and may be added onto
the mortgage or paid separately.
The premium rate varies from 0.50%
to 3.75% of the mortgage amount
depending on the size of your down
payment. Most people commonly refer
to this insurance as "the CMHC
or GE Capital" insurance.
What are the benefits?
A high-ratio mortgage lets you put
your money to work by building equity
in a home sooner. In view of the
way housing prices have continued
to rise in Canada, taking advantage
of this home buying tool as soon
as possible is a good idea. For
example, if real estate prices were
expected to rise by 5% in a given
year, a home priced at $200,000
will rise another $10,000 by year
end. A buyer who decided to wait
and save more money would now have
to pay $210K for the same home.
You should consider that as home
values rise, the home of your choice
may be even further out of reach
by the time you save the money you
need for a larger down payment.
Since mortgage insurance protects
the lenders against default, a home
purchase with an insured mortgage and low down payment is no longer
viewed as a riskier transaction
by the lenders, allowing borrowers
to receive the same low interest
rates that are offered to buyers
with 25% or more downpayment.
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