How mortgage insurance can help buy a house

For many  first-time home buyers, coming up with the 20 per cent down payment required to qualify for a mortgage without paying extra for insurance is tough. So most first-timers end up having to pay for the insurance, which can cost anywhere from  half a per cent  to 2. 9 per cent of the total mortgage amount.

The Canada Mortgage and Housing Corporation (CMHC)  provides the insurance which protects your bank against from a default. This means, if you can’t pay and the bank can't get its money back after it has sold your property, the insurance will cover the lender’s expenses.

Here are a few more things you should know about mortgage loan insurance:

Self-employed people pay more
Homebuyers who have a stable income will have a lower insurance premium than those who own their own business or are self-employed. For example, a homebuyer with a stable job who puts down 10 per cent on a property would have to pay 2 per cent mortgage loan premium. If a self-employed person without income validation put the same 10 per cent down on a property, they would have to pay 4.75 per cent. That’s a huge difference!

What this means is, if you have a stable job and were to buy a $500,000 house with a $50,000 down payment (10 per cent), you would pay $9,000 for the insurance. But, if you were self-employed without income validation and put the same $50,000 down, you would have to pay $21,375.

25-year or 30-year amortization
Homebuyers who choose a 30-year amortization will pay what is called an Extended Amortization Surcharge. This adds an additional two-tenths of a per cent to the insurance premium. On a $100,000 home with 5 per cent down and a traditional 25-year mortgage, you would pay $2,612.50 as a premium. With a 30-year mortgage, you would pay $2,802.50.

There are payment options
The mortgage loan insurance can be paid in cash, or the homebuyer can choose to blend the premium into their mortgage payments. Most borrowers blend the payment because even though they will be charged interest on the premium, it allows them to pay the amount off over the life of the mortgage, instead of incurring a large one-time fee.

Get environmentally friendly
CMHC offers an incentive to purchase environmentally features. If you use CMHC insured financing to buy an energy-efficient home, purchase a house and make energy-saving renovations, or renovate your existing home to make it more energy-efficient, you might be eligible for a 10 per cent refund of your mortgage loan insurance premium. You could also have the added flexibility of an extended amortization (up to a maximum of 30 years) without a premium surcharge. This is a great incentive that will allow you to save money and help the earth. 

In order to qualify for mortgage  insurance:
• The home is located in Canada.
• You must have a down payment of at least 5 per cent of the price of a single-family or two-unit dwelling.
• You must have a down payment of at least 10 per cent for a three or four-unit dwelling.
• Your total monthly housing costs should not exceed 32 per cent of your gross household income.
• Your total debt load should not exceed more than 40 per cent of your gross household income.

Please visit the CMHC website for more information. 

Mortgage insurance allows homebuyers who cannot come up with a 20 per cent down payment to purchase a home of their own. For many first-time homebuyers, it seems to be worth the cost of the premiums compared to the idea of potentially never getting into the housing market.

I am trying everything that I can to avoid paying   mortgage insurance,  although I must admit, saving 20 per cent of the cost of a home in Vancouver is a pretty daunting task. And, while the premium might not seem like a lot of money when compared to the size of a mortgage, rolling it into the life of a mortgage will end up costing you much more in the long run once interest over 25 or 30 years is calculated.

Krystal Yee is a marketing and graphic design professional living in Vancouver. She also blogs at Give Me Back My Five Bucks.