Whether you are buying your first house, or have simply decided it is time to move, buying a home typically requires that you get a mortgage loan. A mortgage loan is not uncommon as few people have the means to purchase a home on their own, without the aid of a lender.
Although getting a mortgage is not unusual, prospective homebuyers are expected to pay for a portion of the house upfront themselves. This portion is called a down payment. How much you put down towards the purchase of the house determines how much of a mortgage loan you will need to make up the difference and the type of mortgage you will end up getting.
Mortgage Glossary: Understanding The Language Of Mortgages
Your down payment determines whether you will have a conventional mortgage or a high-ratio mortgage.
A conventional mortgage, according to the Canada Mortgage and Housing Corporation (CMHC is a Crown corporation of the Government of Canada), is a loan that equals up to 80 per cent or less of the purchase price of the property, with a minimum of 20 per cent down payment from you. A high-ratio mortgage is a loan that exceeds the 80 per cent amount, if you come up with less than 20 per cent down payment.
Mortgage loan insurance
If you have less than 20 per cent of the home's purchase price for your down payment, your lender will have to obtain mortgage loan insurance on your behalf. The law requires it of federally regulated lenders. As a high-ratio borrower, you will have to pay for the mortgage insurance premium. This premium can be added to your mortgage balance.
This insurance, also known as mortgage default insurance, protects the lender (not the homeowner) from losses that may arise. For example, if a homeowner defaults on their mortgage and the lender forecloses on the property, the lender will submit a claim to the insurer if the proceeds of the foreclosure do not cover the lender's losses.
Companies that supply mortgage default insurance in Canada, used by most Canadian lenders, include the CMHC and private mortgage insurers.
There are a variety of requirements to qualify for mortgage loan insurance, like:
- The home be located within Canada.
- The amortization period for the mortgage not exceed 25 years.
- The borrower has a minimum 5 per cent down payment.
- The total monthly housing costs (including the expected mortgage payments) shouldn't exceed 39 per cent of the borrower's gross household income. This is called the Gross Debt Service (GDS) ratio.
- The total debt of the borrower (including the expected mortgage payments) shouldn't exceed 44 per cent of the borrower's gross household income. This is called the Total Debt Service (TDS) ratio.
- The purchase price of the home is less than $1 million.
The change in how the GDS and TDS ratios are calculated is in response to the historically low interest rates currently available. The concern being, homebuyers may get themselves into financial difficulty when mortgage rates rise.
These changes may lower the mortgage amount that a homebuyer qualifies for, however it will likely not affect the majority of Canadians as most already get a fixed rate mortgage of which the most popular term is five years.
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