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Undoubtedly the hardest thing to do – especially for first-time homeowners, is saving for their down payment.
Historically, this has been the case with most Canadian consumers, and to assist the consumer, the government introduced mortgage insurance to get more people into the housing market.
Today, when less than 20 per cent of the purchase price is put down (a high-ratio mortgage), the lender will require the consumer to use mortgage insurance to protect them against any payment default.
Now that the lender is protected and has minimized their risk, they are more willing to lend up to 95 per cent of the purchase price.
What this means to today’s consumer is that they can purchase a home with as little as five per cent down in most cases. This has made it easier for many new Canadians to realize their dreams of home ownership much faster and easier than in previous years.
There are three companies in Canada that offer this type of insurance, Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and AIG.
CMHC is a government agency designed to assist homebuyers to get into home ownership, while newer entries into the market have been the privately owned Genworth and AIG.
The policies of all of these companies are basically the same, and in order to qualify for mortgage loan insurance, you need to meet certain conditions.
Here are a few of the main ones:
-The home must be the consumer’s principal residence and located in Canada;
-A down payment of at least five per cent must be available;
-In most cases, home expenses must not be greater than 35 per cent of the monthly household income, and total monthly debts can’t be more than 44 per cent of monthly income; and,
-A further 1.5 per cent of the purchase price must be available to cover closing costs.
The question of where the premium is set is based on the amount of money put down as a down payment. The simple rule is the greater the percentage that’s put down, the lower the premium.
Premiums range from 0.5 per cent on the low end to 3.15 per cent at the top of the scale. This premium is a lump sum and is usually added to the mortgage.
Other than saving your down payment, you may also receive it as a gift from a family member or it could come from borrowing against another property or the sale of property. As a first-time buyer, you can now also withdraw up to $25,000 from your RRSP.
A qualified mortgage professional can explain all of the details and costs of a high-ratio mortgage.
He or she will also go through all the options available to find out which is the best mortgage for any situation and potentially save thousands of dollars throughout the term of the mortgage.
Bailey Stone is a mortgage agent with Mortgage Alliance Kamloops, located at 810 Seymour St. in Kamloops.
