The Ups of Down Payments

For many Canadians,

the hardest part of buying

a home - especially a

first home - can be saving for the

down payment.

If you can only offer less than

25 per cent of the purchase

price as a down payment, you

will normally be required to buy

mortgage loan insurance.

Pioneered by Canada Mortgage

and Housing Corporation

(CMHC), mortgage loan insurance

protects lenders against payment

default, allowing Canadians to

access high-ratio mortgages at the

lowest possible rates.

CMHC mortgage loan insurance

enables you to finance up to 95 per

cent of the purchase price of your

home. This means you can buy a home with as

little as 5 per

cent down. For

example, if you

wanted to purchase a

$250,000 home and you qualified

for mortgage insurance, you would

need a down payment of just

$12,500.

Mortgage loan insurance is

available through your lender, who

contacts CMHC on your behalf.

You need to pay a premium for

mortgage loan insurance, which is

calculated as a percentage based on

the down payment as compared to

the purchase price of the home. A

traditional down payment of 15 per

cent, for instance, would incur a

mortgage loan insurance premium

of 1.75 per cent of the total value of

the loan, while a down payment of

5 per cent would incur a mortgage

loan insurance premium of 2.75 per

cent. Your lender's or mortgage

broker's representative will calculate

your premium, which you can pay

either in a lump sum or as part of your mortgage payments.

Both new and resale homes

are eligible for mortgage loan

insurance, as long as the home is in

Canada and it's your principal

residence. In addition, your total

housing costs (including mortgage

payments, property taxes, heating,

annual site lease, and 50 per cent of

condominium fees if applicable)

should not be more than 32 per cent

of your gross household income,

and your total debt load (including

your housing costs and other debts

such as personal loans, car loans,

and credit cards) should not exceed

40 per cent of your gross household

income. Other criteria may also

apply and are subject to change, so

contact your lender for more details.

CMHC also offers mortgage

insurance that helps homebuyers

obtain a secured homeowner line of

credit of up to 90 per cent of the

value of their principal residence,

either at the time of purchase or if

you want to refinance. The line of

credit lets you draw funds up to your insured credit limit as often

as you wish without the need to

reapply and allows you the

flexibility to pay as little as the

monthly interest charges for a

limited period of time. Full

repayment is required within 25

years from the date the loan

is insured.

CMHC also offers a product

called Flex Down, which makes

finding a down payment even

easier. Traditional mortgage loan

insurance requires borrowers to

fund a minimum of 5 per cent

down from their own resources

when buying a home. With Flex

Down, homebuyers with a proven

track record in managing debt can

provide the 5 per cent down

payment from a variety of new

sources, including borrowed funds

or lender incentives, provided the

funds are at arm's length from (and

not tied to) the purchase or sale

of the property. Currently, the

mortgage loan insurance premium

for Flex Down is 2.90 per cent.

Contact your lender to confirm

availability of this product and for

the qualifying criteria.

For more information about

mortgage loan insurance or to

order your free copy of CMHC's

Homebuying Step By Step

consumer guide and workbook,

please visit our website at

www.cmhc.ca or call toll free at

1-800-668-2642.

Mark Salerno is district

manager for the GTA at the

Canada Mortgage and Housing

Corporation. For over 60 years,

CMHC has been Canada's national

housing agency and a source

of objective, reliable housing

expertise.