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What Is Mortgage Insurance?
Quite often, when speaking to first-time buyers, the subject of mortgage insurance becomes the focus of the conversation. Many ill-informed buyers assume the position of "I'm not going to buy a home until I can save enough money to not have to pay the mortgage insurance premium". This type of thinking will keep many a homebuyer out of the real estate market for a long time. Let's clarify what mortgage insurance is and why some homebuyers need and should use it.
According to Section 418 of the Bank Act, if you're purchasing a home and are borrowing more than 75% of the value of the property, the mortgage must be insured. Mortgage insurance protects the lender against borrower default. This enables you to purchase a home with as little as a 5% down payment. The insurance premium is paid once, at the time of closing, and may be added onto the mortgage or paid separately. The premium rate varies from 0.50% to 3.75% of the mortgage amount depending on the size of your down payment. Most people will commonly refer to this insurance as "the CMHC or GE Capital" insurance.
A high-ratio mortgage lets you put your money to work by building equity in a home sooner. In view of the way housing prices have continued to rise in the Bolton area, taking advantage of this home buying tool as soon as possible is a good idea. For example if the real estate prices were expected to rise by 5% in a given year, a home priced at $200,000 will rise another $10,000 by year end. A buyer, who decided to wait and save more money, would now have to pay $210K for the same home. You should consider that as home values rise, the home of your choice may be even further out of reach by the time you save the money you need for a larger down payment.
Since mortgage insurance protects the lenders against default, a home purchase with an insured mortgage and low down payment is no longer viewed as a riskier transaction by the lenders. Therefore, an insured mortgage will allow borrowers to receive the same low interest rates that are offered to buyers with 25% or more down-payment. Even if you are able to make a larger down payment, you may choose a high ratio mortgage, which will enable you to consider home improvements, an education fund or other investments.
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