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Everything you need to know about mortgage loan insurance

Financing can seem like a harsh reality when you're shopping for your first home. Sure, you're earning a respectable salary, but that figure seems decidedly paltry when set against the price tag of a house or condominium. You begin to envy people in middle age, who have likely owned several homes, been paying off a mortgage for decades and reaped profits on resale.

But there's no need to despair -- everyone has to start somewhere. Just because you can't plunk down a hefty down payment doesn't mean banks and other lenders won't loan you money. There's an instrument in place that enables you to get a mortgage even if you can only come up with a small fraction of a conventional down payment.

How low can you go? 5 percent
People who put down less than 25 percent of the home's price -- for example, less than $50,000 on a $200,000 property -- must get mortgage loan insurance through the Canada Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Company (GEMICO). This insurance is made strictly for high-ratio mortgages (i.e., home loans that exceed 75 percent of the property's purchase price). Its purpose: to protect the bank from mortgage default.

With CMHC or GEMICO insurance in place, you can buy a home with as little as 5 percent down. In the case of that $200,000 home, you would only be obliged to come up with $10,000 up front.

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Using insured loans to finance renovations
A CMHC or GEMICO-insured loan can also be used to finance renovations, in the event that your new home requires immediate repairs. You can include these expenses in your mortgage up to 95 percent of the value. But be warned: the calculation and approval process is perplexing and may not be worth it.

CMHC or GEMICO may sanction the renovations, but first it will require quotes from three different contractors. The mortgage insurers will only dole out the money in installments, which means your renovation will proceed in fits and starts. If the costs of enhancement exceed the lesser of $10,000 or 10 percent of the home's value, you'll have to pay an added 0.5 percent on your insurance premiums.

Avoiding mortgage insurance can be costly
For a high-ratio mortgage, the only conceivable way to bypass CMHC or GEMICO insurance is to attempt a dual-mortgage scenario. Your first mortgage would be with a major bank for 75 percent of your purchase price, and the second mortgage would be with another institution for the remainder of the cost. But this gambit isn't perfect.

"Most banks won't allow second mortgages to go above 85 percent of the total value, so you're still having to come up with 15 percent down," says Ann Pope, a mortgage consultant with Assured Mortgage Services in Toronto. "Second mortgages are really not that cost-effective."

Andre Mayer is a freelance journalist based in Toronto, Ontario.


-- Posted: Sept. 20, 2004
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