What is Mortgage Loan Insurance and Do You Need It?

Congratulations! You've been approved by your bank for a mortgage to finance your new home. Whether it's a luxury home in Cameron Heights or a starter condo in Leduc, the thrill is the same.

Although it seems like every day a new cost is added to your home ownership quest, get ready for yet one more.

CMHC Mortgage Insurance

The Canada Mortgage and Housing Corporation mortgage insurance protects your lender if there comes a time when you can't make your monthly mortgage payment. Most lenders demand that this insurance be in place before approving your loan. You can certainly understand why they want this guarantee.

The lender takes out the insurance and passes the cost of the premium to you. You can't shop for insurance from different providers or have any say in either the premium cost or the terms. You can choose to pay the premium in one payment a year or have it added to your monthly mortgage payments, paying in 12 equal payments. The purchase price of the home determines the premium.

What Does This Insurance Do and What Does It Cost?

The insurance lets your lender feel comfortable enough to lend you money at about the same interest rate as those who put down more on their down payment. Say you put down the least amount possible -- 5 percent. Because of the mortgage insurance, you might get close to the same interest rate as people who put down 20 percent.  

Without this insurance, your lender would charge you higher interest. You may recoup much of the cost of the insurance in these interest savings, so ask your Realtor® to help you calculate the true cost of the mortgage insurance. The mortgage insurance premium costs range from 0.5 to 3.35 percent, depending on the loan amount. 

Understand that mortgage insurance is not the same as mortgage life insurance. Mortgage life insurance pays the remaining balance of your mortgage if you die so that your family will have a mortgage-free home in which to live. You should carefully consider this coverage if you have a family. Ask your Realtor® about where to buy this coverage and how much it costs.

General Requirements for CMHC Mortgage Loan Insurance

In order to qualify for the CMHC Mortgage Loan Insurance, you must meet the following requirements.

• Your home must be within the borders of Canada.
• The value of the home must be less than $1 million when the Loan-to-Value (LTV) ratio is more than 80%. This ratio expresses the lending risk by the lender. Higher LTV ratios are higher risk. This risk is what puts you in the position of either buying mortgage loan insurance or paying higher interest for your home loan.
• Your down payment will need to be at least 5% of the cost of single-family and duplex homes. If the property has either three or four units, the minimum down payment is 10%.
• Usually, you are the one who will have to pay the down payment from your own resources. There are special rules for gifts from family.
• The PITH (Principal, Interest, Taxes and Heating), annual site lease and half condo fees should not be more than 32 percent of your gross income (money you make before taxes are taken out). This is called the Gross Debt Service (GDS) ratio. Before looking for a house to buy, use this formula to find out how much house you can afford.
• The payments on all your debts plus the TDS should not be more than 40% of your gross income.
• Don't forget that you will have to pay closing costs that will probably be from 1.5 - 4% of the price of the home. You will need to write a check for these items at your closing. Don't be surprised. Again, your Realtor® will be able to tell you exactly how much you will need to pay for these costs.

Buying a home is exciting, but it can also cause a lot of anxiety. The experience will be smoother and more enjoyable if you do your research in advance so there are no unpleasant surprises. 

Know what size mortgage you qualify for, how much money you will need upfront, and what your monthly costs will be. Research various lenders or talk to a mortgage broker to find one that you can live with happily for decades. Then, sit back in your new home and enjoy!

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