Purchasing a home can be a very exciting time! If you are looking at buying a home, you have likely already started to save for a down payment. How much you decide to save can range significantly based on how much you can afford as well as the minimum down payment on your new home. What you may not know is that the amount of your down payment can also decide whether or not you need an insured mortgage.
Here are a few things you should know about insured mortgages and how they are changing:
How much is needed for a down payment for a new home?
The minimum amount you’ll need for a down payment depends on the price of the home, and there is no maximum amount. A down payment is paid up front and is deducted from the purchase price of your home, while your mortgage covers the remaining cost of your home.
If your home price is less than $500,000, you’ll need to put at least 5% down.
If your home is priced between $500,000 and $999,999, you’ll need to put down 5% of the first $500,000 of the purchase price, and 10% for the portion of the price above $500,000. Homes priced at $1 million or more require a minimum 20% down payment of the purchase price.
Some borrowers may require a larger down payment for mortgages that are seen to be higher risk. This could include borrowers who are self-employed or have a poor credit history.
What is an insured mortgage?
An insured mortgage is a mortgage that includes mortgage default insurance. If you’re putting down less than 20% towards the purchase of your home (between 5% and 19.99%), it is mandatory to purchase mortgage default insurance in Canada.
The insurance helps to protect the lender in case you’re unable to make your mortgage payments due to default or foreclosure. The cost of your insurance is based on a percentage of your total mortgage amount. The bigger your down payment, the less you will pay for mortgage default insurance.
Are all mortgages insured?
No. If you make a down payment of at least 20%, you will qualify for a conventional mortgage, which does not require insurance. If you make a down payment of less than 20%, you will always require an insured mortgage.
Who insures mortgages in Canada?
In Canada, mortgages are insured through three private insurers: Canada Mortgage and Housing Corporation (CMHC) (a federal Crown corporation), Genworth or Canada Guaranty. The lender typically selects the insurance company on your behalf, so you don’t have to worry about making the choice.
While it’s always ideal to be able to put 20% down on your home, a benefit of an insured mortgage is that it can help people become homeowners sooner, with as little as a 5% down payment.
What’s changing with insured mortgages?
The COVID-19 pandemic is affecting our economy, including our housing market. The country is experiencing job losses, the closure of businesses and fewer people immigrating to Canada. These factors all contribute to our housing market.
The Canadian Mortgage and Housing Corporation (CMHC) is changing their qualification criteria for insured mortgages as a means of helping to reduce their risk during these turbulent times. Note that Genworth and Canada Guaranty are not making any changes to their qualification criteria at this time.
There are several changes that will go into effect on July 1, 2020 and may affect your eligibility for an insured mortgage.
The three main changes include:
1. The maximum Gross Debt Service (GDS) ratios will be lowered from 39% to 35%, and the Total Debt Service (TDS) ratios will be lowered from 44% to 42%.
What does this mean?
Your debt service ratio is based on your monthly expenses divided by your total monthly income. The GDS accounts for the expenses of owning a home, such as mortgage payments, property tax and condo fees, while the TDS adds in the additional debt you may be paying for each month, such as loans or credit card payments.
The lender takes a look at how much you earn monthly, against your anticipated home ownership expenses and current debt you are carrying. They want to ensure that your mortgage payment will be manageable based on these factors.
The amount of debt (by percent) you can carry will decrease slightly with these changes.
2. The minimum credit score needed to qualify will rise from 600 to 680 for at least one household borrower.
What does this mean?
Maintaining a good credit score is important for a number of reasons. Potential lenders look at your credit score to determine the likelihood that you will pay back the money you are looking to borrow.
3. Many non-traditional sources of down payment that “increase indebtedness” will be banned.
What does this mean?
Sometimes, borrowers may use money from other sources to secure their down payment, such as leveraging a line of credit or a personal loan. This is no longer possible. That said, borrowers will still be able leverage other means of accessing down payment money, including:
- Using a loan from their RRSP through the Home Buyers Plan
- Using a home equity line of credit from a second property, or a home equity line of credit on a property owned by their parents if the money is gifted.
These rules will take effect for CMHC only on July 1, but you should always talk to an expert to know what your options might look like when buying a new home.