If you’re a homebuyer, these are interesting times.
Following a recent HalifaxToday article discussing how the mortgage process might evolve in 2020, as of July 1, The Canada Mortgage and Housing Corporation (CMHC) has changed the requirements for an insured mortgage.
These changes include an increase of the minimum credit score to 680, reductions to accepted debt-service ratios, and eliminating non-traditional down payment sources. It is important to understand what mortgage insurance is, know what options you have, and to get started early when considering buying a home.
What is Mortgage Insurance?
Simply put, mortgage insurance is a policy that protects the mortgage lender in the event of default. In Canada, you are required to purchase mortgage insurance when you contribute a down payment that is less than 20-per cent. Your mortgage insurance premium costs a percentage of the mortgage amount and is tiered based on the size of your down payment. Even though this sounds like it only benefits the lender, it helps to make mortgages more affordable and accessible for Canadians. Contributing a smaller down payment increases a borrower’s risk of default. Normally this risk would be offset by higher interest rates which are bad for borrowers. In other cases, many borrowers would have to delay purchasing a home until they save up a 20-per cent down payment.
Therefore, mortgage insurance policies give lenders the confidence to offer lower interest rates and provide a larger range of borrowers the opportunity to purchase a home with as little as a 5-per cent down payment. It is important to note that in some cases you may require a larger down payment. Depending on the price of the property, the number of units, and whether the home is owner-occupied will impact the minimum down payment.
Do I have Options?
The short answer is both yes and no. If you are putting down less than 20-per cent, you will need mortgage insurance. The CMHC changes will have an impact on some borrowers but there are options. The CMHC is one of three insurers in Canada. The private insurers Genworth Canada and Canada Guaranty also offer mortgage insurance in Canada. At this time, it appears that these other insurers would not follow the policy changes implemented by the CMHC. Unfortunately, this will have the largest impact on rural borrowers. The CMHC insures the majority of high-ratio purchases in rural Nova Scotia. At this time, Canada Guaranty and Genworth are not expanding their policies to rural mortgages and borrowers will be limited to mortgage insurance from the CMHC.
It is important to start the process sooner than later. If you are thinking about buying a home in the future you should speak to an unbiased mortgage professional to come up with a financial plan.
Should I keep Saving?
If you are unable to meet the requirements of the CMHC, you may be able to turn to one of the private insurers in Canada. Depending on your location you may have options on which insurer you can leverage if you are unable to save a 20-per cent down payment. In some cases, you may need to work on improving your financial profile and this might include saving a larger down-payment or buying a more affordable home.
Some borrowers prefer to save the larger down payment to avoid paying mortgage insurance premiums. It comes down to making sure your decision is aligned with your financial goals.
Where can I find more information?
You can find more information about mortgage insurance on each of the provider websites. You can read more about the CMHC here, Canada Guaranty here, and Genworth here. It is important to understand your options and to work with an unbiased mortgage professional that has a good understanding of your financial goals. Depending on your goals, and how long you plan to stay in your new home, you may want to consider contributing a larger down payment. Starting early will help you plan ahead and understand your options.
If you’re planning on buying a home in 2020, you should speak with an unbiased mortgage professional. Mortgage brokers will help you understand your options, from down payments to mortgage insurance.
With rates at an all-time low and changes to qualifications, starting early ensures that you won’t face any surprises along the way. If you’re looking for more information about the home buying process, be sure to check out this informative blog. New content is posted weekly about everything from buying your first home, to getting the most out of your mortgage.
For additional information, contact Clinton Wilkins Mortgage Team or call 902-482-2770.