With a conventional mortgage the purchaser must have at least 25% of the purchase price available for a down payment. You may to borrow up to 75% of the purchase price or the appraised value of the property, whichever is less. The advantage of a conventional mortgage is that you are not required to purchase mortgage insurance. “Mortgage insurance” protects the financial institution against any shortfall should you default on the mortgage and should not be confused with mortgage life insurance. Whenever a mortgage exceeds 75% of the value of the property the borrower must purchase mortgage insurance, thus becoming a high-ratio mortgage.
With a high-ratio mortgage the purchaser has less than a 25% down payment. These mortgages are often referred to as NHA mortgages because they are granted under the provisions of the National Housing Act. You can borrow up to 95% of either the purchase price or the appraised value of the property (whichever is less) but are required by law to insure the mortgage and pay a one-time insurance premium based on the total value of the mortgage.
On July 9, 2008 the Federal Government announced that 40-year amortizations and 100 per cent loan-to-value mortgages will not be available after October 15, 2008. A maximum amortization of 35 years and 95 per cent of the value of the property will continue to be available to meet the needs of borrowers.
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 25% of the purchase price. Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with a small down payment — with interest rates comparable to those with a 25% down payment.
Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.
You can purchase mortgage insurance from Canada Mortgage and Housing Corporation (CMHC), a federal government crown corporation, or a government approved private insurer such as GE insurance.
How Much Does Mortgage Loan Insurance Cost?
To obtain mortgage loan insurance, lenders pay an insurance premium to an approved private insurer. Typically, your lender will pass these costs on to you. This will be an upfront cost or it may be added to the principal amount of the mortgage. When you apply for a mortgage your lender will give you the exact price and tell you if you have to pay the premium upfront or if it is going to be added to the principal amount of the mortgage.
The mortgage loan insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. Mortgage loan insurance premiums vary from 0.5% to 4.0% of the amount of the total mortgage depending on the terms of the mortgage plus an application fee. The lower the percentage of the down payment, the higher percentage you will pay in insurance premiums.
There are additional criteria to be considered when applying for a high-ratio mortgage such as purchasers' credit score, minimum loan terms allowed, maximum amortization periods, allowable purchasers' debt levels, source of the down-payment, use of the property (single family/duplex/investment), plus many more.
Home Equity Line of Credit (HELOC).
A Home Equity Line of Credit, abbreviated HELOC, refers to a loan based on the equity in your home. The amount borrowed may be up to 75% of the appraised value with a draw period anywhere from 5 to 25 years and allows you to borrow HELOC funds whenever you have the need; you’re only required to pay back the amount you use plus interest. One benefit with a HELOC is that often, you are only required to pay the interest monthly until the end of the draw period. At the end of the draw period, you'll have to do one of the following:
- Pay back the unpaid balance of the principal amount borrowed
- Pay a balloon payment
- Make payments based on a loan amortization schedule
A HELOC differs from a conventional mortgage in that the interest rate on a HELOC is variable depending on an index (Prime Rate for example). Interest is paid monthly and is charged on the unpaid balance. This should be the only cost involved with a HELOC. In plain terms, this means your interest rate will be lower than the interest rate on a conventional mortgage and will most likely change over time! The principal payments are flexible and can be made as funds become available. As the principal balance is paid down you can withdraw amounts up to the original principal amount to finance a business, make renovations, pay tuition, take a vacation, or buy a new car.
A Home Equity Line of Credit can be good or bad depending on how you use it.
SAGETIPS.COM points out 10 things savvy home owners should look for when considering a HELOC:
- No HELOC application or administration fees or at least the fee should be refunded at closing. If your lender assesses an application fee, make sure it's refundable when you withdraw the funds.
- No home appraisal fee or closing costs - there are plenty of no-cost options available that you shouldn't have to pay a home appraisal fee.
- No HELOC account maintenance or check-writing fees - Lenders already make money when you write checks on the HELOC. If your lender tries this, dump him!
- No "usage" fees – Apparently, HELOC lenders dont approve of the notion that a homeowner may want to have a HELOC as an emergency "reserve" account. Definitely look for a lender that does not charge this type of fee.
- The annual percentage rate (APR) is an expression of the effective interest rate the borrower will pay on a loan. Look for a HELOC with a variable APR equal to or near the prime rate (adjusted quarterly) – Interest charged on the balanced borrowed should be the only cost!
- Periodic cap on interest rate changes (the amount that the rate can be changed at one time) - Look for a HELOC that adjusts quarterly (rather than monthly) in increments of 0.5% or less.
- Lifetime cap on rate increases (the amount that the rate can be adjusted over the loan's life) – You'll want to find a HELOC with a lifetime rate cap that you can live with. Ask your loan officer to clearly spell out the "worst case" scenario for HELOC rate increases!
- Ability to convert to a fixed rate loan – When rates do rise, people often get skittish about their variable-rate debt. A useful feature to look for in a HELOC is the ability to convert the line of credit to a standard fixed-rate, fixed-term home equity loan.
- Interest-only payments allowed – Get this option but only use it if you need to! It's always best to pay down the principle, not just interest!
- Unrestricted ability to repay principal without penalty – You should be able to pay off the HELOC at any time without paying a penalty!