Down Payment Requirements & Default Insurance

A down payment is the amount of money that a purchaser will be providing from his or her proceeds (not borrowed) towards the purchase price of the property being purchased.

In a conventional mortgage, the down payment is at least 20% of the purchase price. If the property you want to purchase is over $1 000 000, you must have at least 20% down.

However, you can purchase a property with as little as 5% down. For example, if your property is $400 000, you can purchase it with as little as $20 000 ($400 000 x 5%) down.

If your property is over $500 000, you are required to have a 10% down payment for the portion of the purchase price that is over $500,000. For the portion up to $500 000, only 5% is required. For example, let’s say you want to purchase a property for $600 000. For the first $500 000, you need $25 000 down (5% x $500 000). And for the remaining $100 000 ($600 000 – 500 000), you need $10 000 down (10% x $100 00). So your total down payment required is $35 000 ($25 000 + 10 000).

If you are putting less than 20% down, then the mortgage is considered “high-ratio” and mortgage loan insurance/mortgage default insurance is required. The premium is based on the total loan and the amount of down payment.

Here are CMHC’s fees:

Down Payment Premium on Total Loan
5-9.99% 4.00%
10-14.99% 3.10%
15-19.99% 2.80%

For most up-to-date numbers, visit the CMHC website (https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm).

For example, let’s say you are buying a $400 000 property and want to put 5% down ($20 000 = 5% x $400 000). Your mortgage amount = $400 000 – $20 000 = $380 000. Since you are putting 5% own, your premium is 4.00% of the total loan. So your default insurance premium is $380 000 x 4.00% = $15 200. You don’t have to pay the premium upfront. The premium is added onto your mortgage and amortized over the length of the mortgage. So your new total mortgage is $380 000 + $15 200 = $395 200.

The premiums in the chart are applicable when your down payment is from “Traditional Sources”. Traditional sources of down payment include: Applicant’s savings, RRSP withdrawal (under the Home Buyer’s Program),  proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant from federal, provincial or municipal agency), funds borrowed against proven assets, sweat equity (<50% of min. required equity), land unencumbered.

Non-traditional sources of down payment include: Any source that is arm’s length to and not tied to the purchase or sale of the property, such as borrowed funds, gifts and 100% sweat equity. If your down payment is from non-traditional sources, your premium is 4.50% of the total loan.

In addition to CMHC, Genworth Financial and Canada Guaranty are, also, default insurance providers.

Note that HST must be paid on the mortgage default insurance. This HST cannot be added to the mortgage loan, so it must be paid on closing.

Make sure down payment is in your bank account for over 90 days.

As you can see, default mortgage insurance helps more people purchase properties. For most properties, you only have to put 5% down to purchase a property. Additionally, the down payment can come from numerous sources. As a mortgage professional, I can help you through the ins and out of this process and answer any questions you have. Contact me today for a personalized solution to your unique situation.

LTV Explained

A mortgage can be either conventional or high ratio. The classification is based on the mortgage’s loan-to-value (LTV). What is LTV?

A mortgage can be either conventional or high ratio. The classification is based on the mortgage’s loan-to-value (LTV). What is LTV?

LTV = Mortgage Amount/ Property Value

For example, let’s say you are purchasing a property for $500 000 and you are putting 20% down ($100 000). The mortgage amount = $500 000 – $100 000 = $400 000. So the LTV = 400 000/ 500 000 = 80%

Mortgages with an LTV less than 80% (because you put more than 20% down) are called conventional mortgages.

Where as, a mortgage with an LTV greater than 80% (because you put less than 20% down) are called high ratio mortgages. If a high ratio mortgage is provided by a bank, mortgage default insurance is needed on the loan. CMHC, Genworth Financial and Canada Guaranty are three default insurance providers. The premium for this default insurance is added to the mortgage amount and amortized over the length of the mortgage.

If the mortgage is not provided by a bank, mortgage default insurance isn’t required. However, lenders often charge a lender’s fee to create a reserve fund and offset the risk of providing a high LTV mortgage. This means that even if you don’t qualify for a mortgage at a bank, you can still get a high ratio mortgage. This is where a mortgage agent can help the most. Contact me right now, so I can find the best lender for your unique situation.