If your down payment is less than 20% of the purchase price of the home you want to buy, a regular mortgage is out of your reach. Do you wait and save more, or buy now and borrow more? If you buy now, you'll have to get a costlier high-ratio mortgage or a second mortgage.
|||Save more and wait to buy||Buy now and borrow more|
Pay less interest
Pay more interest
Don't have to buy mortgage insurance
Increased costs, as have to buy mortgage insurance and pay interest on it if you pay monthly
Risk spending what you've saved
Risk taking on more debt than you can handle
A high-ratio mortgage lets you borrow up to 95% of the purchase price. But you’ll have to buy mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC) to cover the higher risk of this loan. You can pay for your insurance in a single lump sum when you buy your home. Or, add it to your mortgage and include it in your monthly payments. If you choose to pay the insurance monthly, you'll pay interest on it.
Example — Here's how much you would pay to insure your mortgage with CMHC on a $200,000 home — depending on the amount of your down payment.
|Down payment||Amount of mortgage||Interest rate||Cost of insurance|
First, you borrow as much as you can with a regular mortgage — also known as a first mortgage.
Then you get a second mortgage for the rest. You get this loan from a different lender. You'll usually pay a higher rate of interest for a second mortgage. The lender is taking a greater risk because it may not get its money back if you have to sell your home. That's because the lender that holds your first mortgage is first in line.
You may not qualify for the higher debt: When you apply for a mortgage, lenders add up your monthly housing costs and figure out what percentage they are of your gross household monthly income. This figure is called your Gross Debt Service (GDS) ratio. You won't be considered for a mortgage if your GDS ratio is more than 32%. Learn more about how lenders calculate the GDS ratio.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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