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Mortgage loan insurance and down payments

Region: Ontario Answer # 409

Most people finance the purchase of their homes with a mortgage loan.

Traditionally, financial institutions would only give mortgages for up-to 75% of the value of the home, and therefore required a down payment of 25% of the purchase price. However, you can now purchase a home with a down payment of less than 20%, but you must acquire the necessary mortgage insurance, commonly called “mortgage default insurance” or “mortgage loan insurance”. This allows home buyers to obtain a mortgage for up-to 95% of the value of the home. Mortgage insurance gives lenders greater protection from the risk of home buyers who become unable to repay their mortgage loan.

Down payment amounts

According to Canada Mortgage and Housing Corporation (CMHC), to get mortgage loan insurance, you’ll need the following minimum down payment:

  • If a home costs $500,000 or less, you’ll need a minimum down payment of 5%.
  • If a home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.

Mortgage loan insurance is not available where the purchase price of a home is $1 million or more.

The maximum amortization period, that is, the length of time it takes to pay off a mortgage in full, is 25 years for mortgages with mortgage loan insurance.

Who qualifies for mortgage loan insurance?

There are a number of general requirements to qualify for mortgage loan insurance. In addition to making a down payment of at least 5% for homes costing up-to $500,000, and 10% on the portion of any mortgage it insures over $500,000, most insurers require that:

  • the home is located in Canada,
  • the purchase price is less than $1 million,
  • the home is used for full-time personal occupancy,
  • total monthly housing costs (GDS), including mortgage payments and property taxes do not exceed a maximum of 39% of gross monthly income,
  • total debt load (TDS), which includes total monthly housing costs plus other debts, such as credit card payments or car payments, shouldn’t be more than a maximum of 44% of gross household income,
  • at least one borrower or guarantor seeking insurance have a credit score that is greater than or equal to 600 (down from the previous 680), and
  • the buyer has proof of income to ensure that they can service the loan.

The lender may also have additional requirements, such as an appraisal of the value of the home, and an insurance application fee.

Mortgage insurance premiums

The cost of mortgage insurance can vary depending on the amount of the down payment: the bigger the down payment, the lower the mortgage loan insurance premium. Generally, the cost of the insurance ranges from 0.6% to 3.6% of the amount of your mortgage. You can pay the premium in one lump-sum payment to avoid interest costs, or it can be added to your mortgage and paid off as a regular part of your mortgage payments. HST on the cost of the insurance premiums, however, must be paid at the time the insurance is purchased. Your lawyer, real estate agent or financial institution can provide you with additional information about mortgage insurance. You can also contact the mortgage insurance companies directly, or visit Canada Mortgage and Housing Corporation.

 

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