First-Time Home Buyer Spotlight: Mortgage Loan Insurance

Back in 1954, home ownership became more accessible to Canadians. In that year, the Canadian Mortgage and Housing Corporation (CMHC) debuted its Mortgage Loan Insurance. Lenders began extending financing on condition of a 25% down payment.

Fast forward to 2017. These days, more than sixty years later, Canadians can enter the housing market with as little as 5% down. Many first-time buyers have mortgage loan insurance to thank for it.

What It Is And What It's Not

Mortgage loan insurance is also flittingly known as mortgage default insurance. It covers lending institutions for loss in the event that a homeowner defaults or goes into foreclosure.

The lender purchases this government-prescribed insurance and pays the premiums. However, costs are invariably passed onto the homeowner - usually in the form of a lump sum or factored into monthly mortgage payments. The upside: insurance lets homebuyers put less money down, finance up to 95% of their home's purchase price, and still obtain more favourable mortgages rates.

Two other types of insurance are sometimes confused with mortgage loan insurance, but they're not synonymous: homeowner/property insurance and mortgage life insurance. The former covers homeowners' losses from such events as fire and theft. The latter ensures payment of outstanding mortgage amounts in the event that the homeowner dies or becomes disabled and unable to pay.

The Rules And Requirements

Mortgage loan insurance is required for purchases financed with less than 20% down. Although the minimum acceptable down payment is 5%, mortgagees must still pass additional financial approval thresholds, such as a maximum total debt load of 40% of gross income.

CMHC-insured loans only cover mortgages with a maximum purchase price or as-improved property value under$1,000,000.

First-time homebuyers should also be aware that closing costs such as legal fees and land transfer taxes are not included and must be paid outright upon closing.

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