Mortgage insurance is something many people are subject to when purchasing a home. Determined by your down payment, it will also have an impact on your overall monthly mortgage payments. While additional insurance costs may not sound pleasant at first, mortgage insurance indirectly helps make home buying easier. Here's what you need to know about mortgage insurance and why it's important.
What is Mortgage Insurance?
In Canada, the minimum down payment required on a home is 5% of the purchase price. According to the Canada Mortgage and Housing Corporation (CMHC), anything less than 20%, lenders will require mortgage insurance.
How Does It Work?
This type of insurance not only allows you to purchase a home with a lower down payment, but it also protects lenders from homeowners that may default on their loan. Once your mortgage insurance rate is determined, the amount will be added to your total monthly payments when you close on your home. Over time, you'll make payments back on the combination of what's owed, therefore fulfilling your side of the mortgage agreement.
How Much is Mortgage Insurance?
Make sure to speak with your lender about the insurance premium on your loan. The amount is calculated as a percentage of the amount the lender covers versus the size of your down payment.
For example, if you put 5% down on a $385,000 condo ($19,250), you'll be expected to pay $14,630 in mortgage insurance - this will be added to the overall cost of your home. Conversely, putting 15% down on the same condo ($57,750) means only $9,163 will be added. Again, 20% down (or more) means you won't be required to pay mortgage insurance at all. Use this mortgage calculator to help you determine your down payment and mortgage insurance costs.
How Do I Get It?
Depending on how much you put down, you'll want to make sure you can sustain the cost of your mortgage, mortgage insurance, and home ownership overall. Here are a few general insurance requirements to help you determine if the amount you're putting down matches your financial needs.
- For most cases, the down payment can only be 5% for the first $500,000 (anything more requires 10% on the remaining amount).
- Your Gross Debt Service (GDS) ratio should not be more than 32% of your income.
- Your Total Debt Service (TDS) ratio should not be more than 40% of your income.
- Prepare for additional costs such as closing costs, condo fees, property taxes, etc.
In short, mortgage insurance makes home buying an option for those with a smaller down payment - so long as you regularly pay the amount agreed upon with your lender. Now that you know what to expect when it comes to your down payment and mortgage insurance, you'll be better able to anticipate the costs of home ownership.