Canadians can buy a home for as little as 5%
Down Payment, under two major programs administered by both CMHC, a Federal Crown Corporation, and GE Capital
Mortgage Insurance Co, a private sector insurer.
There are two major programs in existence:
1. The Regular CMHC/GE Capital Programs:These programs allow you to obtain a
Mortgage of up to 90% of the purchase price. It can be used by any qualified borrower who is not a first-time homebuyer, who has 10%, or more as a down payment, or who wishes to purchase a home whose value is above the "ceiling" established in that area for the First Home Loan Insurance Program.
Depending upon the percentage of down payment to be used, CMHC and GE charge the following one-time insurance premium to you, the borrower. This premium can be added to the mortgage without affecting the Loan To Value ratio (LTV). Note: the following fee schedule also applies to the 5% down program described in "2" below.
| Down Payment = |
% Financing
(as % of mortgage amount) |
Insurance Premium |
| 5 - 9.9% |
90.1% - 95% |
3.75% |
| 10 - 14.9% |
85.1% - 90% |
2.50% |
| 15 - 19.9% |
80.1% - 85% |
2.00% |
| 20 - 24.9% |
75.1% - 80% |
1.25% |
| 20 - 24.9% |
65.0% - 75% |
0.75% (special circumstances) |
| 35% plus |
Up to 65% |
0.5% (special circumstances) |
So in the example given above, the mortgage of $178,000 would be subject to a 2.5% Insurance fee because it is 89% of the purchase price. The fee would be $4,450, and the total mortgage amount $182,450. To qualify for a CMHC insured mortgage:
- your monthly payments for "shelter costs" (mortgage Principal and interest plus taxes and heating) must be no greater than 32% of your gross pre-tax family income.
- your monthly payments for all obligations - shelter costs plus loan, lease and credit card payments, plus alimony etc. - must not exceed 40% of your gross pre-tax family income.
- the payments on your mortgage must be calculated using the 3 year rate offered to you by your financial institution (5 year rate for the 5% down program).
Example:
- If the best 3-year rate you can get is 6.5%, the monthly payment on the $182,450 mortgage shown above - at a standard 25 year Amortization - is $1,222.09. If your annual taxes are $2,000 and annual heating $1,200, then your annual shelter costs would total $17,865.12. Assuming no other payments, an income of $55,830 ($17,865/32%) would qualify you for this mortgage.
- If you have monthly car and credit card payments of $475.00, this would add $5,700 to your annual debt servicing, for a total of $23,565. Dividing this figure by 40% (see above) gives a required qualifying income of $58,900.
If your actual income is greater than $58,900, you're in the clear. If it is less, you must decide whether to cut back on the mortgage amount or pay down some other debt to bring yourself within qualifying range.
In general, the credit status of an applicant must meet the lending criteria of the particular mortgage lender. Also, while CMHC qualifies an ex-bankrupt applicant to obtain insurance three years after discharge with subsequent re-established credit, many lenders' own rules over-ride this feature, and they will decline the application.
On the other hand there are a number of lenders who specialize in granting and administering mortgages to the full extent of the National Housing Act at competitive interest rates.
In addition to the slight differences described above in mortgage term (which must be 5 years or greater) and qualifying ratios (Total Debt Service ratio cannot exceed 40%) there are a few important conditions which apply to eligibility under this program:
- the price of the home must be within the eligibility ceiling for the area...three major centres- Toronto, Vancouver and Victoria qualify for $250,000...22 other centres plus all North-Eastern Ontario centres have a $175,000 ceiling, and the rest of Canada's ceiling is pegged at $125,000. These are constantly under review, however.
- the applicant must be able to prove that their down payment comes from their own resources - savings, sale of investments, etc... the exception being a family gift that never has to be repaid, and which is in the borrower's possession before the application for Mortgage Loan Insurance is sent to CMHC.
An excellent program which - when combined with the "Home Buyers" RRSP plan (in the case of first-timers only) - creates a formidable plan which by some estimates makes as many as 35% of current Canadian renters eligible to purchase their first home.
Mortgage avance and counsel > First Time Home Buyer
