dcsimg
CANADA MORTGAGE AND HOUSING CORPORATION
home | contact us | français
 

Important Notice

As of February 15, 2016, the minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price (or lending value) of $500,000 or less, the minimum down payment is 5%. When the purchase price (or lending value) is above $500,000, the minimum down payment, as a percentage of lending value, is 5% for the first $500,000 and 10% for the remaining portion.

Example:

For a home with a purchase price (or lending value) of $600,000, the minimum down payment required is:

= 5% of $500,000 + 10% of $100,000
= $25,000 + $10,000
= $35,000

Knowing Your Mortgage Options


Knowing Your Mortgage Options

Introduction Slide

(Visual) Canada Mortgage and Housing Corporation Logo

(Visual) Text: The CLASSROOM for Mortgage Professionals. Free training and webinars to expand your expertise

Slide 1

(Visual) Header Text: Canada Mortgage and Housing Corporation, Knowing Your Mortgage Options

(Visual) Title: Understanding Mortgages

(Visual) Footer: Everything you need to open new doors, Canada Mortgage and Housing Corporation Logo with Home to Canadians tagline and Canada Wordmark.

Whether you are a first time home buyer or considering refinancing your existing home, it is important to make informed housing finance decisions that will help make homeownership viable and affordable over the long term.

Canada Mortgage and Housing Corporation, CMHC, is Canada’s national housing agency. CMHC shares a wealth of knowledge and housing expertise to help create an informed and reassured homeownership experience.

We know that when it comes to buying your home, nothing is more valuable than peace of mind. Therefore, we encourage you to take the time to plan and understand your mortgage options. In doing so, you will be prepared to manage your mortgage long into the future.

Slide 2

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: In this presentation:

(Visual) Footer: www.cmhc.ca and Canada Mortgage and Housing Corporation Logo with Home to Canadians tagline is used throughout the presentation

When going through the home buying process, you will hear many mortgage related terms and conditions. In this presentation, we will provide information on the following topics:

  • The difference between a conventional and a high-ratio mortgage.
  • What is mortgage loan insurance?
  • The difference between a fixed, variable or adjustable interest rate.
  • Options for amortization, term and payment schedules, and
  • Choosing between an open or closed mortgage.

Throughout the presentation we will be looking at several mortgage scenarios to help you consider which options best meet your particular needs. We will also provide you with links to additional sources of information to assist you in the home buying process. Let’s get started!

Slide 3

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Conventional Mortgage

Determining whether you will have a conventional or a high-ratio mortgage will typically depend upon the amount of down payment you have towards the purchase of your home.

A conventional mortgage is a mortgage loan up to a maximum of 80% of the lending value of the property. In other words, the home buyer has a down payment of at least 20% of the purchase price or market value of the home.

Slide 4

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: High-Ratio Mortgage

A high-ratio mortgage is a mortgage loan which is higher than 80% of the lending value of the property up to a maximum of 95%.

In the case of a high-ratio mortgage, the home buyer has a down payment which is less than 20% of the purchase price or market-value of the home.

Generally, mortgage loan insurance is required by lenders when homebuyers make a down payment of less than 20% of the purchase price of a home.

Note that mortgage insurance is available only for properties with a purchase price, lending value or as-improved / renovated value below $1,000,000.

In Canada, mortgage loan insurance is offered to lenders by CMHC and other private insurers. We will go over mortgage loan insurance in more depth in a moment.

First, let’s look at how down payments differ between Conventional and High-Ratio or CMHC-insured mortgages.

Slide 5

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Example

In this example, let’s assume that the purchase price of the home is $250,000.

Under a Conventional mortgage, a maximum loan of up to 80% of the purchase price or $200,000 could be financed. This would require the home buyer to provide a down payment in the amount of $50,000.

Under a High-Ratio or CMHC-insured mortgage, a maximum loan of up to 95% of the purchase price could be financed.

In this example, a CMHC-insured mortgage loan of 90% of the purchase price, or $225,000 would result in a down payment requirement of $25,000. That’s $25,000 less than the down payment requirement for a conventional mortgage.

Most mortgage loan insurance products require home buyers to provide the down payment from their own resources, such as savings and RRSP’s. Gift down payments from immediate relatives are also acceptable.

For down payments of less than 10%, CMHC also enables lenders to offer home buyers the flexibility to use additional sources of down payment. For more information on down payment requirements, consult your mortgage professional.

Slide 6

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Mortgage Loan Insurance

Let’s take a moment to look closer at mortgage loan insurance. As we have already discussed, generally mortgage loan insurance is required by lenders when the home buyer makes a down payment of less than 20% of the purchase price of a home.

Mortgage loan insurance protects the lender against financial losses due to payment default by the homeowner. To obtain mortgage loan insurance, lenders pay an insurance premium. The premium payable for mortgage loan insurance is based on the percentage of the home’s purchase price that is financed by a mortgage. Typically, your lender will pass this cost on to you. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payment.

CMHC offers mortgage loan insurance on loans up to a maximum of 95% of the purchase price or market value of your home. For most people, the hardest part of buying a home – especially a first home – is saving the necessary down payment. With mortgage loan insurance from CMHC, you can own your home with a minimum down payment of 5%. In the previous example, this meant a difference of $25,000 in terms of the down payment required for a home costing $250,000.

Additionally, mortgage loan insurance from CMHC helps you to access the most competitive interest rates in the market – comparable to those typically reserved for home buyers with a down payment of 20% or more. Equally important, a CMHC-insured mortgage ensures that you will continue to obtain the most competitive interest rate at each term renewal since the insurance covers the full life of the mortgage, typically 25 years.

Slide 7

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: What is interest? What is principal?

One of the first aspects of a mortgage that you will need to consider is what type of interest rate option best suits your needs. Interest is the cost of borrowing money and is usually paid to the lender in regular payments along with repayment of the principal or the amount you borrow for a loan.

Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.

Slide 8

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Interest Rate Options, Fixed, Variable, Adjustable

Mortgage interest rates are either fixed, variable or adjustable.

A fixed interest rate is a locked-in rate that will not increase for the term of the mortgage. The regular payment amount also remains fixed.

A variable interest rate fluctuates based on market conditions while the mortgage payment remains unchanged.

With an adjustable interest rate, both the interest rate and the mortgage payment vary based on market conditions.

Evaluating the impact of an increasing interest rate on your monthly payment is an important mortgage planning tip.

Interest rates are at historical lows. While this helps to make homeownership affordable today, an increase in interest rates could have a significant impact on your future monthly housing costs.

Slide 9

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Other Important Considerations

Once you have determined your interest rate type, you will need to select an amortization period, term and payment schedule. Let’s look at each of these terms separately.

Slide 10

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Amortization

The term amortization refers to the amount of time over which the entire debt will be repaid.

The maximum amortization period is 25 years.

Although a longer amortization period may mean lower mortgage payments, it is to your advantage to choose the shortest amortization period that you can afford. This will reduce the amount of interest you pay over time.

Slide 11

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Term

Another component of your mortgage is called the “mortgage term”. The mortgage term defines the length of time that the agreed-upon mortgage contract conditions will be fixed. Mortgage terms can vary from six months to 10 years.

Choosing a longer term, for example five years, gives you the chance to plan ahead and protects you from interest rate increases while you adjust to homeownership.

Weigh your options carefully and don’t be afraid to ask your lender to work out the differences between a one, two, five-year or longer term.

Slide 12

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Payment Schedules

A mortgage loan is typically repaid in regular payments, either monthly, semi-monthly, bi-weekly or weekly.

Payment schedules that are more frequent can save some interest costs by reducing the outstanding principal balance more quickly than with monthly payments.

The more payments you make in a year, the lower the overall interest costs you have to pay on your mortgage.

Slide 13

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Accelerated Payments

Another option to repay your mortgage faster is by accelerating your payments. This option is available for both weekly and bi-weekly payment schedules.

An accelerated payment schedule results in a slightly higher regular payment amount that, over the course of a year, generally equates to the payment of one extra monthly payment towards the principal of the mortgage.

Choosing an accelerated payment can help to pay off your mortgage faster and lower the overall interest costs.

Slide 14

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Example

(Visual) Text on Slide: Loan Amount - $200,000, Amortization – 25 years, Interest Rate – 5%

For example, this table illustrates the savings a borrower can achieve by choosing a bi-weekly accelerated payment over a monthly payment.

Based on a mortgage loan of $200,000 at a 5 percent interest rate, and amortized over a 25 year amortization period, the borrower can pay off their mortgage about 3.5 years sooner and save just over $24,000 in overall interest costs.

Keep in mind that mortgages may have other important payment features that can also save you money and let you be mortgage-free sooner. Speak with your mortgage professional for more details.

(Visual) An example, where the loan amount is $200,000, the amortization is 25 years, and the interest rate is 5%, uses a table to summarize the savings a borrower can achieve by choosing a bi-weekly accelerated payment over a monthly payment, as follows:

  • The monthly payment amount is $1163.00, and the bi-weekly accelerated payment amount is $582.00
  • The mortgage is repaid in 25 years with the monthly payment option, and in 21.5 years with the bi-weekly accelerated payment option
  • The total interest paid is $148,963.00 with the monthly payment option, and is $124,789.00 with the bi-weekly accelerated payment option
  • The interest saved is not applicable with the monthly payment option, and is $24,174.00 with the bi-weekly accelerated payment option

Slide 15

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Open Mortgage

Another factor to consider is whether you want an open or closed mortgage. Each option offers different payment flexibilities.

An open mortgage is flexible and can usually be pre-paid by any lump sum or paid off at any time without penalty. An open mortgage can be a good choice if you plan to sell your home in the near future or plan to pre-pay with large lump sums.

Open mortgages are typically arranged for shorter terms and may involve higher interest rates than those offered for a closed mortgage.

Most lenders will allow you to convert to a closed mortgage at any time, although you may have to pay a small fee.

Slide 16

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Closed Mortgage

Alternatively, a closed mortgage may provide for lump sum payments and increases to the regular payment amount, but is generally not as flexible as an open mortgage. Often penalties or restrictive conditions are attached to prepayments or additional lump sum payments beyond what is permissible.

For example, closed mortgages are usually restricted to a maximum 10% lump sum payment annually. A closed mortgage may be a good choice if you’d like to have a fixed payment that will allow you to adjust your budget to your new lifestyle. It may not be the best choice if you decide to move before the end of the term or if you want to benefit from a potential decrease of interest rates.

Slide 17

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Example, John and Michelle are first time homebuyers, Mortgage options chosen

Let’s take a look at a few examples of the mortgage options we have just discussed.

John and Michelle are first time homebuyers. They have saved a 5% down payment so will require a high-ratio or insured mortgage loan. John and Michelle want to have a fixed mortgage payment to make sure they are staying within their budget. They have chosen a 25 year amortization period.

John and Michelle spoke with a mortgage professional and decided to get a 5 year fixed rate mortgage. The 5 year fixed rate option means that the interest rate on their mortgage will be locked in for a 5 year term.

John and Michelle found it easier to budget based on a fixed monthly payment, using a 25 year amortization period. As they are first time homebuyers, they chose a closed mortgage as they do not expect to be in a position to make frequent lump sum payments and intend to remain in their new home for at least the next five years.

Slide 18

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Example, Todd and Sara have saved a significant down payment, Mortgage options chosen

In this next example, Todd and Sara have saved a significant downpayment to buy their home and want to pay their mortgage off as soon as possible.

After speaking with their mortgage professional, they decided on a 3 year open variable rate mortgage with accelerated bi-weekly payments and an amortization period of 20 years.

The 3 year variable rate means that their interest rate will fluctuate based on market conditions, but their bi-weekly payment will remain the same for the 3 year term.

The amortization or the amount of time that it will take Todd and Sara to pay their mortgage in full is 20 years. However, as they chose an open mortgage, they may be able to pay off their mortgage sooner by having the flexibility to make lump sum payments or paying the mortgage in full at any time without penalty.

Choosing accelerated bi-weekly payments versus monthly payments is another way that Todd and Sara can pay their mortgage off more quickly, resulting in less interest costs.

Slide 19

(Visual) Header Text: Understanding Mortgages

(Visual) Subtitle Text: Your Mortgage Options

(Visual) Text on Slide:

  • Conventional/Hi-Ratio
  • Mortgage Loan Insurance
  • Interest Rate Types
  • Amortization
  • Term
  • Payment Schedule
  • Open/Closed Mortgage

Understanding all of your mortgage options will prepare you for the next step – finding your new home.

Slide 20

(Visual) Header Text: Everything You Need To Open New Doors

As Canada’s national housing agency and leading source of objective and reliable housing information, CMHC can also help to open the world of housing information – all under one roof.

Our publications cover every facet of owning, maintaining or renovating a home. For information on CMHC products, services and publications, visit www.cmhc.ca or call CMHC at 1-800-668-2642 to get the answers from someone you can trust.

Slide 21

CMHC – Home to Canadians

(Visual) Canada Mortgage and Housing Corporation Logo with Home to Canadians tagline

(Visual) Disclaimer: This presentation is not intended to provide financial or other advice and should not be relied upon in that regard. The information (including the assumptions and examples) it contains are provided for general illustrative and estimative purposes only, and does not take into account the specific objectives, circumstances and individual needs of the reader. All information is provided on an "as is" basis without warranty or representation of any kind, express or implied and it is not intended the reader will rely on this information without verifying the full terms of CMHC underwriting policies. The reader should be aware that other conditions, requirements and restrictions may apply and that the information is subject to change without notice. CMHC assumes no responsibility or liability of any kind in connection with the information provided. CMHC and the names of any CMHC products and services, as well as any logos or drawings are trademarks, registered trademarks or official marks of CMHC.© 2012, Canada Mortgage and Housing Corporation. All rights reserved.

Slide 22

(Visual) Canada Wordmark