Of Prime Interest: Options to cover a down payment

For most first-time home buyers, the most challenging aspect of buying a house is the down payment.

The two down payment mortgage options are a conventional mortgage, which requires at least a 20 per cent down payment, and a high ratio mortgage with the absence of a 20 per cent down payment requires mortgage default insurance.

While sometimes confused with creditor mortgage life insurance, which provides insurance protection for a mortgage holder in the case of their death, mortgage default insurance is an insurance which guarantees the mortgage by protecting the lender should the homeowner be unable to continue their payments for some unforeseen reason.

The insurance also provides the lender (your bank) with the flexibility to offer you the same competitive rates available to home buyers with a larger down payment. The mortgage premiums range from 1.75 to 2.75 per cent of the mortgage amount based on down payment. These mortgage premiums are paid once and are added to the principal balance of the mortgage.

As an example if you are purchasing a home for $400,000 with a five per cent down payment your mortgage amount would be $380,000 after down payment.

The 2.75 per insurance premium would be $10,450 would be added to your mortgage amount.

In the same instance if you were to put 15 per cent down, the premium would be reduced to $7,000. If you were to refinance your mortgage at any point, provided the mortgage with the refinance is still high ratio, you are only required to pay a top up insurance premium on the amount you are increasing.

It is to their benefit to try and work with homeowners and offer solutions when a financial hardship occurs rather than start a foreclosure proceeding.


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