With home prices skyrocketing in the most sought-after housing markets like Toronto and Vancouver, not every homeowner can afford to make a 20 per cent down payment. The good news you may still be able to buy a home – the government is willing to lend you a helping hand. You can make a down payment between 5 per cent and 19.99 per cent, but there’s a catch: you’ll need mortgage insurance.
When you put less down, you’re viewed as a higher risk to mortgage lenders. Mortgage insurance compensates your lender if you don’t pay back your mortgage. Although foreclosure is always an option, if the housing market takes a turn for the worse, your lender may not be able to recover all the money owed to it. That’s where mortgage insurance comes to the rescue.
Advantages of Mortgage Insurance
If you’re like most buyers, you probably see mortgage insurance as just another cash grab. While it does cost you money, it helps you get into the housing market when you otherwise wouldn’t have been able to. Without mortgage insurance, many buyers would be forced to sit on the sidelines until they could save up a 20 per cent down payment. Homebuyers could find themselves priced out of the market if their savings aren’t able to keep up with how quickly home prices are rising.
Without mortgage insurance you’d pay a higher mortgage rate. The higher the risk, the higher the interest rate you’ll pay to your lender. Borrowers are a lot more likely to default on unsecured debt like an outstanding balance on their credit card than secured debt like a home equity line of credit when there’s not a valuable asset like your home at stake. Since mortgage insurance makes sure your lender is compensated if you fail to repay your mortgage, it’s a less risky loan for lenders.
Disadvantages of Mortgage Insurance
The biggest disadvantage of mortgage insurance is the cost. Although you can pay your mortgage insurance premiums up front, few buyers do. (Why would you get mortgage insurance in the first place if you could afford to pay it off on closing?) Most buyers choose to amortize their mortgage insurance over the life of their mortgage.
When you make your regular mortgage payment, you’re paying your mortgage insurance premiums along with mortgage interest and principal. This can prove costly – your mortgage insurance premiums can end up costing you thousands over the life of your mortgage. You’ll more than likely come out ahead if home prices continue to go up, but if we see a housing correction, you could end up kicking yourself.
If you’re on the cusp of a 20 per cent down payment, you might consider waiting to buy a home until you’ve saved enough to avoid mortgage insurance. If your parents are nice enough to give you a gift, perhaps they can help.