Mortgage insurance allows home buyers who might otherwise not yet be able to afford it to enter the GTA real estate market. In exchange for this access, mortgage insurance requires premiums to protect the lender in case the buyer ever defaults on the loan.
Mortgage insurance premiums are generally added to monthly mortgage payments, which is something you may want to avoid. But it’s hard to get around if you don’t have enough money for the conventional down payment. Here we look at some ways you may be able to elude paying mortgage insurance premiums.
Save for a 20% Down Payment
Essentially, if you save 20% or more for your down payment, you can avoid taking on mortgage default insurance premiums. In Canada, mortgage lenders require a premium if you have a down payment of less than the conventional 20%. This acts to protect the lender in case you default on your payments.
Maintain Good Credit
To obtain a mortgage, a lender will need to perform a credit check. There are no guarantees, but if you can maintain and prove that you have a good credit rating, the lender may not require that you take out mortgage insurance.
Organize Financial Documents
When you meet with your lender, make sure to have all of your financial documents organized and prepared to present your monetary situation. There are no guarantees, but being able to show that you’re not a risky borrower may help you.
If You Cannot Avoid Insurance
If you cannot avoid mortgage insurance, you can still attempt to remove this addition requirement over time. By monitoring your home’s value, you may be able to remove the mortgage insurance if the value has increased. How this works is that you refinance your home at the new market rate if the interest rates are still attractive. The refinancing may put your home’s equity up above the 20% mark that is required for mortgage insurance.
Let’s say you put down 5% on a $500,000 home, and your mortgage is approximately worth $475,000. Now let’s say that three years later the market rate of your home rises 25% and it is now worth $625,000. When you refinance at a similar interest rate, your house will be assessed at $625,000 but your mortgage will still be around $475,000, minus what you have paid off on the principal in the last three years – let’s assume the remaining mortgage is now $450,000.
So your equity is now $175,000, and the down payment needed on $625,000 would be $125,000 (20% of total home value)- enough to avoid mortgage insurance. At this stage, you have actually removed the requirement for the mortgage insurance as you now have more than 20% equity in the home.
Speak to your mortgage broker from VERICO The Financial Forum Ltd. to see what your options are to avoid taking on mortgage insurance. No matter your credit history, income, or qualification criteria, we can find something that works.