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If you feel unclear about what your down payment options are and how mortgage default insurance comes into play, you are likely not alone. When buying a home in Canada, mortgage default insurance premiums are impacted by the percentage of your downpayment and the purchase price of your desired home. Many people are not aware of the pros and cons of different down payment options or the purchase price tipping points that affect the requirements. So let’s break it down.
Many savvy potential homeowners carefully save, invest and manage their money with the goal of having a 20% down payment to purchase a new – or new to them – home. Since the amount of your mortgage decreases the higher your down payment is, this is a desirable goal for many homebuyers. The benefits include smaller monthly payments, more immediate equity in your home, and exemption from paying an insurance premium of up to 4% interest.
This insurance premium is required in Canada for down payments less than 20% for any mortgage and the borrower pays for these premiums in full at the commencement of their mortgage payments. Mortgage default premiums may be provided by any one of the three national insurance providers: the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, or Genworth Financial.
The percentage you pay on the mandatory default insurance depends on the size of your down payment. For example:
| Your Down Payment % | Your Mortgage Default Insurance Premium |
| 5% Down Payment | 4.0% |
| 10% Down Payment | 3.1% |
| 15% Down Payment | 2.8% |
| 20% Down Payment | 0% |
Although the 20% down payment is attractive to avoid paying mortgage default insurance, there are some reasons why it may not be ideal for all home buyers.
Mortgage default insurance premiums ultimately exist to protect the lender, but there are benefits for homebuyers as well. These premiums entice lenders to provide lower mortgage rates because the risk is assumed by the mortgage insurer if the borrower defaults on their mortgage payments. It also can benefit homebuyers when the real estate market would be inaccessible for them if more than a 5% down payment were required to get into a home. When housing costs are on the rise, this can be a reality for many people.
Does purchase price impact the minimum down payment requirement in Canada? Yes, it does and one dollar can make all the difference. The magic number for a minimum 5% down payment is a purchase price of $500,000. Once you exceed this price, everything changes. A purchase price of $500,001 and beyond triggers new mandatory minimum down payment criteria for home buyers:
| Your Purchase Price | Your Minimum Down Payment |
| $500, 000 or less | 5% |
| $500, 001 – $999, 999 | 5% on the first 500,000 + 10% on the remaining portion |
| $1,000,000+ | 20% of purchase price + no insurance premiums allowed |
Being aware of these criteria when shopping around for your next home is an important consideration. This is especially true when considering properties around and above the $500, 000 or $999, 999 thresholds where $1 can make all the difference in what is required for your down payment.
There are many financial details that can impact your down payment options and ultimately what your mortgage will look like in the short term and long term. Homebuyers in Edmonton, Alberta have the advantage of not having additional PST costs to consider, but there are many additional costs and requirements to factor in including:
These elements and more will impact mortgage qualification, down payment options, and the potential necessary cash flow to make your transition into a new home as ideal as possible. Homebuyers who are provided with a clear picture of all costs associated with buying a home feel more empowered to make informed decisions. They also experience a lot less disappointment along the way.
It is always ideal to discuss your options for the purchase price, down payment, and additional costs with a mortgage specialist. You want to ensure you are getting the optimal solution for your mortgage needs both immediately and into the future.
Our experts at Mortgage Force Team are licensed, dedicated, and passionate professionals committed to this goal every day. Purchasing a home is one of the most exciting and important
decisions you can make. We work for you and with you so you can fully understand all the options and what makes sense for your unique situation.
Talk with us for free today to find your best mortgage solution.
Posted by MortgageApplyOnline On January 11th, 2022