The Bank of Canada prohibits lenders from advancing more than 80% of a property’s fair market value. When a home purchaser is able to make a down payment equal to at least 20% of a home’s market value, they qualify for what’s known as a conventional mortgage. Such a mortgage agreement is arranged strictly between the lending institution and the home buyer, without a third parties intervention.
Many people these days in Calgary find it difficult to save such a large amount of money for a deposit, especially with the increased housing prices over the past few years. For some, it could take years to save such a large down payment. Yet, most Calgarians want the benefits that home ownership provides while they are young and raising families. Here is where the Canadian Mortgage and Housing Corporation (CMHC) comes into play. CMHC is a Crown corporation that insures high ratio mortgages for banks and lenders. A high ratio mortgage is one where more than 80% of the property’s value is financed by the bank or lender. Lenders are required by law to insure all high ratio mortgages with CMHC. Mortgage insurance protects the lender in the event that the buyer defaults on the mortgage principle. CMHC isn’t the only option on the block for mortgage insurance. Companies such as Genworth, and some insurance companies are starting to issue mortgages for banks and various other lenders.
If you meet your lenders credit approval & criteria, you can purchase your next home with as little as 5% down and a CMHC insured approved mortgage for the balance.
When you apply for a high ratio mortgage, you or your lender will be charged a CMHC application fee of $235.00. In addition, you’ll also be charged an insurance premium that ranges from .5% to 3.75% of the mortgage amount. The premium varies based on the amount of your down payment, between 5% and 20%. While a purchaser may choose to pay the insurance premium in advance, it is not required. Alternatively, it can be added to the mortgage and paid off as part of the Mortgage.
When you finance a property using a CMHC insured mortgage you are required to demonstrate your ability to provide the agreed upon down payment plus an additional amount of cash to cover closing costs. CMHC will want to ensure that you have access to funds equaling 1.5% of the purchase price to cover legal fees and other closing costs.
CMHC requires buyers to take a minimum mortgage term of 3 years. The reason for this is they want you to have a fixed payment while you’re getting established in your new home. Keep this in mind when determining your price range. In some cases a three-year mortgage will have a higher interest rate than a shorter term, therefore increasing your carrying costs, and reducing the amount that you are qualified to borrow.