Purchasing your new home in Alberta with a low down payment might seem to be an excellent investment option. Some creditors even allow buyers to acquire properties with a 5% down payment.
However, most lenders require you to purchase mortgage insurance to secure their interests. If you are shelling out a down payment of anything less than 20% of the property value, you need to purchase one of these policies.
Now, you might be wondering how much it would cost you to buy a mortgage insurance policy in Alberta. Here’s a comprehensive guide to help you gain a clear idea of this aspect — you can click here to learn more about how an insurance advisor can help you save on various types of coverage in Alberta, like home insurance.
How would you benefit from mortgage insurance in Alberta?
Before delving into the benefit, you must look at the downside of such an investment in mortgage insurance. Homeowners need to shell out around 3% to 4% extra, calculated on the mortgage amount when purchasing these policies.
However, purchasing mortgage insurance works wonders when you want to take out a home loan or mortgage. If the down payment is less than 20% of the property value, the lenders consider you a high-risk borrower. In these cases, they would want to secure their interests by making it mandatory for you to purchase the policy. This way, you can acquire up to 95% of the funding for the new property.
Also, having a mortgage insurance policy can slash down the interest rate. Ultimately, you would be saving in the long term. Mortgage insurance, also termed CMHC (Canada Mortgage and Housing Corporation) policy, can help you afford the property!
When would you need mortgage insurance?
As a thumb rule, all property buyers making less than 20% down payment on the property value need to purchase mortgage insurance. The final amount essentially pivots around the purchase price of the property. Here are some more details you would find beneficial.
- The minimum down payment for a property costing more than $500,000 is 5%.
- For mortgages backed by CMHC, the maximum amortization period is 25 years.
- For properties exceeding $500,000 in value, you need to shell out at least a 5% down payment on the initial $500,000. Property owners need to pay a 10% down payment on the remaining amount.
- The mortgage CMHC insurance would not be applicable for properties exceeding $1,000,000. Therefore, it is mandatory for property buyers to make at least a 20% down payment to obtain a mortgage.
In order to qualify for the mortgage insurance policy, your total debt service ratio has to be less than 42. The gross debt service should not exceed 35, while you should have 680 as the minimum credit score. Moreover, homeowners should have the down payment as cash in hand, as they are not entitled to borrow the fund from a different lender.
How much is mortgage insurance in Alberta: calculating the costs
The cost of mortgage insurance in Alberta depends on the amount you shell out as a down payment. The following premium rates would be applicable when you purchase the policy.
- If the down payment is between 15% and 19.99%, the premium rate would be 2.80%.
- For a down payment between 10% and 14.99%, you need to pay the premium at 3.10%.
- Homeowners making just 5% to 9.99% as the down payment have to pay around 4%.
Here’s a brief example to help you understand the calculation. Suppose you take out a mortgage of $500,000 to purchase a house in Alberta. Now, you make a down payment of 15%, which amounts to $75,000. In this case, your mortgage premiums will be calculated at 2.80%.
Do you really need mortgage insurance?
The mortgage insurance is not mandatory if you are willing to shell out at least 20% of the property’s overall value as a down payment. Therefore, if you are in a financially sound position, you can save the cost of premiums by making a sizable down payment. However, homeowners who need more than 80% funding for the property value should go for mortgage insurance. The OSFI (short for Office of the Superintendent of Financial Institutions) has placed these guidelines, considering the interests of the lenders.
Simply put, you can avoid mortgage insurance if you have adequate funds in hand. Mortgage insurance would be necessary to avail a mortgage for an amount exceeding 80% of the property value.
What would your mortgage insurance cover?
The CMHC insurance policy would cover the loan amount you have borrowed from the lending institution. In case of any unfortunate development or defaulting on your end, the insurer will compensate your mortgage creditor for their losses. After the CMHS sells off your property, they will make up for the losses. However, as a property buyer, you remain responsible for clearing off the mortgage.
Remember, the purpose of having mortgage insurance is not to secure the borrower from foreclosure or default.
You might come across the term mortgage life insurance or mortgage protection insurance. These policies will secure the lender if you undergo any unfortunate situation like death, critical illness, disability, or job loss. This is an optional policy that you can purchase in addition to the CMHC policy. Many private insurers offer these policies, and you might consider having one in place.
The purpose of mortgage insurance or a mortgage life insurance policy is not to offer any sort of coverage for the property. Therefore, you should have a separate home insurance policy in place to secure your assets. It makes sense to consult one of the established insurance specialists to know about the best deals around. You need to ask yourself questions like, “how much is a mortgage insurance policy in my province?”.
With too many insurers offering good insurance schemes, choosing the most suitable one often becomes challenging. Besides, you need to make an informed decision when it comes to something as sensitive as insuring your home. Consult an insurance expert for professional advice on the policy that would suit your requirements.