Mortgage insurance can be both a confusing term and concept to consider when you are looking at your financing options.
I explain it this way to my clients: Anytime someone goes into a house purchase with less than 20% down payment, one of these insurance companies (Canada Mortgage & Housing Corp; Genworth or Canada Guarantee) get involved in the transaction. The only difference between these companies is that CMHC (Canada Mortgage & Housing Corp) is a government run agency – while the other 2 are private run companies. In essence they do the same thing and for that, I will combine the three of these into the term “CMHC” for ease of explaining. Note: the minimum down payment needed for most purchases (unless you are self employed) is 5% of the purchase price.
Now without these insurance companies, we would approach the lender and ask that they finance 95% of your purchase. Lender would then say – NO – they don’t like the risk, not happening. OK, so if the lender wants minimum 20% payment to consider your mortgage application and you only have 5%. What happens now?
Well we get the insurance companies involved in the transaction like this: “CMHC” steps in and says to the big bank: “You know what big bank? We will get involved in this transaction and we will then give you a “money back” guarantee should these clients not be able to make their mortgage payments for whatever legitimate reason. Bank is happy now as they have NO risk any more so bank is good with all this. However for you, the insurance company says to you: “We will get you into your house with as little as 5% down payment; and since we charge you a fee to do this – we will add this fee onto your mortgage so you do not need to pay this out of pocket. Win-win so far for all parties.
Now things you need to be aware of with the insurance companies, the more down payment you have, then the less their insurance premium (risk) is. Meaning if you put 5% down payment from your own resources, “CMHC” will charge you 2.75% of the balance needed to finance. If you put 10% down payment, they reduce their fee to 2%. If you put 15% down payment, their fee is reduced to 1.75% as their risk is much less and if you have 20% down payment, then “CMHC” will say “Hey you don’t need us anymore as you an deal directly with your bank”.
Now these insurance companies might have a few more conditions to meet in order to have your financing approved or be a little stricter in proving down payment etc., but these don’t usually cause any real additional issues. And besides, since you will be gathering paperwork together anyway, it is easier to come up with additional documents versus saving up for 20% down payment (in my opinion).
Some of this additional documentation may refer to “closing costs” that are charged by your lawyer’s office; however that is for another chapter.
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