Area of Law: Real Estate Law
Answer # 409
Mortgage loan insuranceRegion: 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, with mortgage insurance, home buyers can now obtain a mortgage for up-to 95% of the value of the home. Canada Mortgage and Housing Corporation (CMHC) requires as little as a 5% down payment for homes costing up-to $500,000, and a 10% down payment on the portion of any mortgage it insures over $500,000.
For example, to buy a home for $750,000, the home buyer would need a minimum down payment of $50,000, which is the total of:
- 5% of $500,000 ($25,000), plus 10% of the remaining $250,000 ($25,000)
Mortgage loan insurance
Mortgage insurance gives lenders greater protection from the risk of home buyers who become unable to repay their mortgage loan. If you are considering purchasing a home with less than a 20% down payment, your lender will require you to arrange the necessary mortgage insurance, commonly called “mortgage default insurance” or “mortgage loan insurance”.
A mortgage with less than a 20% down payment is considered to be a high-ratio mortgage, and in this case, mortgage loan insurance is only available where the purchase price of a home is less than $1 million. 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 (CMHC normally restricts its GDS ratio to 35%, however, borrowers with reliable income and good credit may be allowed to exceed these guidelines up-to the maximum 39%),
- 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 (CMHC normally restricts its TDS ratio to 42%, however, borrowers with reliable income and good credit may be allowed to exceed these guidelines up-to the maximum 44%),
- the buyer’s credit rating score is a minimum 600, 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 Rate Stress Test
In January 2018, the Government of Canada’s Office of the Superintendent of Financial Institutions (OSFI) amended the mortgage rules introduced in 2016 that require Canadian home buyers to take a mortgage stress test to qualify for a mortgage at a bank. Previously, this test was only required to approve buyers who had a down payment of less than 20% and required mortgage loan insurance. Now all buyers, including those with a down payment greater than 20% who do not require the default loan insurance must take a mortgage stress test.
The stress test is applied at the time of the mortgage loan insurance application. It is conducted to ensure that the home buyer could still afford the mortgage if interest rates were to rise. For more information on the mortgage stress test, view What mortgage loan amount can you qualify for? Stress Test.
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.
If you are buying a home and want to know how much of a mortgage you qualify for, use the Scotiabank mortgage calculator .
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