Homeowners who purchase properties with less than 20% down can take advantage of today’s low interest rates — thanks to mortgage default insurance.
This insurance, which is provided by Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada and AIG United Guaranty, provides lenders with the protection they need to lend these high ratio mortgages. The thinking is that if you only put down 5-19%, you’re considered to be at a higher risk of defaulting than someone who puts 75% down.
While this insurance ultimately protects the lender, consumers end up paying the premiums. These one-time premiums range between 1% and 2.75% of the total mortgage. The larger down payment you have, the lower your premium. The premium is charged at the onset of the mortgage, and homeowners have the option of paying it upfront or rolling it into the total cost of the mortgage.
While the former option may seem wiser, it typically makes sense to roll it into the mortgage and use the additional funds to increase your down payment and thus lower your premium.
Although it may seem like a lot of extra cash, mortgage default insurance allows homeowners to buy homes faster — thus saving thousands of dollars in rent — and take advantage of lower mortgage rates. While a 20% down payment is typically ideal, it’s nice to know there are other options out there.