What happens if you put down less than 20% on a house?

What happens if you put down less than 20% on a house?

In Canada, we can provide mortgage financing to qualified homebuyers with down payments as low as 5% down. With less than 20% down, the mortgage is now insured against default. Mortgage default insurance can help buyers purchase a home and begin building equity sooner, compared to renting – where you gain no equity and increase your landlord’s equity. Default insurance may also be required when a borrower has more than a 20% down payment if the property does not meet the lender’s requirements, or if the borrower is qualifying under a special program and considered a higher risk to the lender.

What is Mortgage Default Insurance?
Mortgage default insurance is there to protect the lender in case you miss mortgage payments, or are unable to pay your full payment amount. This is called being in default. Missed payments are the most common type of default, but you can also default if you break terms in your mortgage contract, so it’s important to make sure that you are fully aware of all of the fine print that comes along with your mortgage commitment before you sign on the dotted line. At Gail Sylvester Mortgages, we will go through all of the conditions of your commitment to ensure that you are fully aware of all of your options and what’s expected of you from the lender.

How does Mortgage Default Insurance work?
The name can be a bit misleading, as mortgage default insurance is only there to protect the lender and not you as the borrower. If you default on your mortgage, the lender and insurer will step in to make sure they are reimbursed for the mortgage proceeds that you borrowed from them. This could mean forcing the sale of your home to recoup the mortgage amount. This also means that if your home is sold at a loss, the insurer will cover the shortfall to the lender, ensuring that they fully recoup their money. The insurer does have the option to recoup that loss from you, which they had to reimburse to the lender on your behalf.

You are responsible for paying the insurance premium, which is calculated from a percentage of your purchase price, depending on how much you’re putting down. This premium is usually added to the principal amount of the mortgage, so you are paying it throughout the term of your mortgage, rather than upfront. In Ontario, you are required to pay HST on the insurance premium at the time of closing as we pay tax on all insurance policies. We outline all of these closing costs upfront so you always know exactly what you’re paying for and why.

If you feel you are at risk of going into default, reach out to Gail Sylvester Mortgages! We can help with all of your financial needs and look at all of your options to help you avoid defaulting on your mortgage.

How do I qualify for Mortgage Default Insurance?
Mortgage default insurance is commonly referred to as “CMHC insurance” since CMHC (Canadian Mortgage and Housing Corporation) has historically been the largest provider of this insurance. However, there are two other mortgage default insurance providers in Canada. In July 2020, CMHC tightened the requirements to qualify for CMHC insurance, making it more difficult for some first-time buyers to qualify for a mortgage.

However, Sagen (formerly known as Genworth Canada) and Canada Guaranty, the two other Canadian mortgage default insurance providers, did not change their qualifications. This means if your gross and total debt ratios do not meet CMHC’s standards, there are other insurance providers that your lender can work with to have your mortgage approved. This has led to an increase in insured purchases through Sagen and Canada Guaranty that we’ve not previously seen and as a result, and these insurance providers have ensured that they have no plans to change their qualifications to meet CMHC’s.

Canada’s Mortgage Default Insurance Providers

 

Putting down less than 20% is not just for first-time homebuyers. You can put as little as 5% down on your next purchase or even cottage purchase as well. Call Gail Sylvester Mortgages today and let’s chat about your options to see what works best for you and your family’s financial goals.

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