Making wise choices when it comes to mortgage insurance

Canada Mortgage and Housing Corporation, dubbed CMHC was Canada’s first mortgage insurance program. It was introduced in 1946 and was designed to help Canadians buy homes with less than 25% down (now 20% as of 2006). If it weren’t for this insurance program, the lenders wouldn’t take the risk of mortgaging homes with less than 20% down or equity.

There are also some competitors to CMHC, first is Genworth Canada whom took over GE Canada in 2003, and most recently there is Canada Guaranty whom bought out AIG’s interest’s in 2010.

Most people think that mortgage insurance is only for first-time buyers, however they have many lines of products that serve most Canadians and one can use them to purchase revenue properties and commercial properties alike. So essentially if you’ve got less than 20% down, you’ll require mortgage insurance unless you are going through a private lender.

Mortgage insurance 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 20% or more down.

While this insurance ultimately protects the lender, consumers end up paying the premiums. These typically one-time premiums range between 0.50% and 4.75% of the total mortgage. Larger down payments mean that your premiums will be lower. 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 along with building equity in ones home.

While a 20% down payment is typically ideal to save yourself possibly thousands of dollars of insurance premiums realize that without the mortgage insurance programs, our economy would likely not be as strong as it is, and our Canadian landscape would look drastically different without it.

Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres – Regional Mortgage Group.

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