An Overview for Homebuyers

When embarking on the journey of buying a home in Alberta, understanding the intricacies of insured mortgages is crucial for those unable to make a 20% down payment on their new home. An insured mortgage, often a necessity for many first-time buyers and those with limited upfront capital, comes with its own set of rules and implications.

What is an Insured Mortgage?

In Alberta, an insured mortgage is required for homebuyers who have less than 20% of the purchase price available for a down payment. This type of mortgage, classified as a high-ratio mortgage, has a loan-to-value (LTV) ratio exceeding 80%, indicating that more than 80% of the property’s value needs financing. As a result, the loan must be insured against default for the benefit of the lender.

Key Elements of Insured Mortgages

Mortgage Default Insurance: This is insurance that protects the lender in case the borrower defaults on the loan. As mentioned above, this insurance is mandatory on high-ratio mortgages with an LTV that exceeds 80%. It is important to note that although the lender passes on the cost to the borrower, this insurance is for the lender's protection and benefit, not the borrower's.

Down Payment Requirements: The minimum down-payment required for an insured mortgage in Alberta, is 5% for the portion of a home’s price below $500,000, and 10% for any portion exceeding $500,000 (up to $1 million).

Insurance Providers: In Canada, mortgage insurance is most commonly provided by the Canada Mortgage and Housing Corporation (CMHC), but private insurers like Genworth Financial Canada (now Sagen) and Canada Guaranty provide mortgage insurance as well.

Premiums Costs & Payment: Premiums are calculated as a percentage of the loan, and are based on the size of your down-payment. The higher the percentage of the home’s value (price) you borrow, the higher percentage you will pay in insurance premiums. In other words, the premium rate escalates as the down payment size decreases. However, you will often receive a lower interest rate on your mortgage, offsetting some of the cost.

These premiums, which can be substantial, are added to the mortgage amount and are paid throughout the loan's lifespan. Here is a table of CMHC’s premiums as an example:

Loan-to-Value Ratio: Insured mortgages typically have an LTV ratio greater than 80%. This higher LTV ratio signifies a higher risk for the lender, which the insurance mitigates.

Credit Score Criteria: A good credit score is usually required to qualify for an insured mortgage, reflecting the borrower's financial stability.

Property Price Limits: Mortgage loan insurance is only available for properties with a purchase price below $1 million in Canada.

Impact on Interest Rates: As mentioned, due to the decreased risk to the lender associated with an insured mortgage, borrowers with insured mortgages may encounter lower interest rates than they would typically qualify for with a conventional mortgage.

Summary

In essence, an insured mortgage in Alberta is a strategic option for those who are looking to buy a home but are unable to afford a large down-payment. While it facilitates home-ownership, it's important for potential buyers to understand the additional costs and requirements involved. Insured mortgages are particularly prevalent among first-time homebuyers, offering a pathway to home-ownership while ensuring lenders are protected.