Getting a mortgage after a Bankruptcy or Consumer Proposal? Here’s what you need to know about mortgage loan insurance.
Now that you’ve been discharged from Bankruptcy / completed your Consumer Proposal and rebuilt your credit, you’re keen to take the next step toward home ownership.
You’re saving, you’re budgeting for all the costs involved — and you’re nearly ready to put an offer in. But have you factored mortgage default insurance into your calculations?
Mortgage default insurance (commonly known as CMHC loan insurance) protects your lender in the unfortunate event you default on your loan. In exchange for reducing your lenders’ risk, they’re able to offer lower mortgage interest rates to you. As a result, mortgage default insurance has opened the possibility of homeownership to a far wider number of Canadians.
Why save a down payment?
Think of a down payment as an initial good faith deposit against the principal value of your mortgage. It demonstrates to your lender that you’re financially prepared to take on the costs of homeownership.
Down payments are also mandatory. The minimum on any mortgage in Canada is five percent for any home under $500,000. Homes between $500,000 and $1 million, requires five percent down for the first $500,000 and 10 percent down for the remaining balance. And any mortgage with less than 20 percent down requires mortgage default insurance*.
But it’s not all about your lender, though. You benefit by reducing the amount you’ll pay per month and over the lifetime of your mortgage. The more you save, the less you pay, so, we recommend building up as large of a down payment as possible.
*Mortgage insurance is not available for purchase price >$1 million. You would need to save the full 20 percent to qualify for financing.
Who offers mortgage default insurance?
There are three mortgage default insurance companies in Canada. Each charges the same rates, and your lender will typically choose which insurer they will work with based on their existing relationships.
- Canada Mortgage and Housing Corporation (CMHC) [Crown corporation]
- Canada Guaranty [Private mortgage insurer]
How do you qualify for mortgage default insurance?
As of July 2020, borrowers must meet the following criteria to be eligible for mortgage default insurance coverage:
Maximum amortization of 25 years — This is the length of your initial mortgage term. While longer terms are available, they would require at least 20 percent down to avoid the mortgage default insurance requirement.
Gross debt service ratio of less than 35 percent — This measure is calculated by dividing your total household expenses by your total household income.
Total debt service ratio of less than 42 percent — This measure is calculated by dividing the sum of your anticipated mortgage payments, property taxes, and other debt payments by your gross household income.
Credit score of at least 680 — Your credit score is a numerical representation of your overall creditworthiness. You can check this number for free through many online banking services and credit bureaus, or for a fee through several third parties.
Must not borrow money for their down payment — You must demonstrate you’re financially capable of saving toward your real estate purchase, and only your mortgage provider may have security in your amortization.
What does mortgage default insurance cost?
The premium is a percentage of your home’s purchase price. The chart below illustrates different premiums amounts you’d pay based on the amount of down payment on a $300,000 home amortized over 25 years.
|
Down payment (%) |
Premium (%) |
Premium ($) |
|
<5 |
-- |
Does not qualify for mortgage |
|
5 |
4.0 |
11,400 |
|
10 |
3.1 |
8,370 |
|
15 |
2.8 |
7,140 |
|
19 |
2.4 |
5,760 |
|
20 |
-- |
Does not require default insurance |
How do you pay mortgage default insurance?
Usually mortgage default insurance is financed as part of your mortgage.
Using our example above: If you buy a $300,000 house, mortgaged over 25 years, with a 10 percent down payment — your mortgage would be $278,370 ($300,000 - $30,000 + $8,370).
Go get that mortgage!
We love success stories
At MNP we’re committed to helping you take control of your finances and get back to living your life. If you’ve recently been discharged from Bankruptcy or completed your Consumer Proposal with MNP and obtained a mortgage, we want to hear from you.
We‘d love to share your story with others who are considering following in your footsteps.
