Should You Put Less Money Down And Pay An Insurance Premium, Instead?

​
​To purchase real estate in Canada, purchasers require a down payment of at least 5 percent of the purchase price up to $500,000 and then a minimum of 10 percent on the remaining amount up to $999,999. So, for example, if you're purchasing a home for $800,000, you will require $25,000 on the first $500,000 and then $30,000 on the remaining $300,000, equalling a total down payment of $55,000. 

High-ratio mortgage insurance, required under Canadian law, is only available to those who have the minimum required down payment. Any purchase price greater than this amount will require a down payment of 20 percent or more. 

High-ratio insurance protects lenders from default and safeguards the banking sector against potential insolvencies. The insurance premium is added to your total loan amount and amortized to a maximum of twenty-five years. There is also an option of paying the premium upfront, which allows you to avoid interest charges charged over the life of your mortgage.

Insured mortgages are considered less risky to mortgage lenders. As a result, insured mortgage products have better interest rates. 

Does it make more sense to take a high-ratio mortgage even if you have 20 percent down?

As mentioned, insured mortgage rates can be less than conventional mortgage rates. For this reason, some borrowers may feel it's advantageous to capitalize on the lower rate by putting less money down. On this note, here are some things to consider: 

1. Putting less down and paying a premium may make sense if you're making use of the money you're not putting down. For example, you may be re-investing the extra funds and earning a higher return than the rate of the mortgage or you may find it beneficial to keep money aside for renovations. 
2. It may also make sense to pay a premium if the lower rate saves you substantial interest over the 5-year term of your mortgage especially when compared to the conventional rate. 

On the flip side,  consider conventional mortgage (putting down 20 percent or more) financing can be amortized up to 30 years, lowering your monthly principal and interest payment. Therefore, this may be the better option if you require extra monthly cash flow.

Of course, the preceding depends on your financial situation, mortgage amount, the premium quoted, and the interest rates offered.

We would be happy to help you sort through your options to determine the best route. If you have any specific questions, please do not hesitate to call or book a one-on-one consultation here. 

RSS Feed