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Low Down Payment, Insured Mortgage – Pros & Cons

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Advantages of Low Down Payments

Low down payments, insured mortgage, or high ratio mortgages as they’re called, give you a foot in the door with significantly less. Rent is out of control in Vancouver and beyond, topping $2200 for a single bedroom, so buying soon makes sense. With fixed interest rates at 5.49% for five years*, $25,000 down still buys a $500,000 condo for not a lot more ($3017 monthly mortgage) than rent. Did you know, your down payment can be a gift from immediate family?

When a Small Down Payment is Fine

When you put down less than 20% you will pay an insurance premium to the lender. Premiums for that $500,000 mortgage are $19,000 with insurers such as Sagen & CMHC (Canada Mortgage and Housing Corporation). 

But low down payments may be all you need if:

  • You want to build home equity. Low down payments get you started on homeownership quicker.
  • You can live with a 25-year amortization. Home buyers with low down payments pay off their mortgages sooner.
  • You want the lower interest rates a high ratio mortgage offers. That directs  more of your payment to the principal. Also, come renewal time you will be eligible for the lowest mortgage rates.

What are the Cons of an Insured Mortgage?

  • Mortgage default insurance is mandatory with less than 20% down. You pay a premium of 4% if you put 5% down. This premium decreases the more you put down.
  • Amortizing default insurance adds interest to your mortgage expenses. If you can afford it, write off default insurance with a one-time, lump sum payment.
  • Interest rates are lower for high ratio mortgages, but the principal you owe is higher. You will have a larger monthly payment when you put down a smaller amount.
  • Conventional mortgages qualify for longer amortization periods, spreading out the repayments. Put 20% or more down if keeping your monthly mortgage payment low is a priority. 

What about zero down payment, or a borrowed down payment?

That depends on how much risk you are prepared to take. Flex Down mortgages require you to borrow the 5% to 10% down payment against a credit line or credit card. This borrowed amount has to be debt serviced, meaning it will become part of your debts that we take into consideration when qualifying you.

Qualifying for an Insured Mortgage

The good news is you don’t have be to be a first time home buyer to qualify for an insured mortgage. Here’s what we look for for borrowers with less than a 20% down payment:

  1. A credit score of at least 600. 
  2. Proof of income. Self-employed borrowers may have to show their business is stable.
  3. A gross debt service ratio (GDS) of 39% or less. That’s the portion of your gross annual income the principal, interest, taxes (PIT), and heat for your new home will consume.
  4. A maximum total debt service ratio (TDS) of 44%. Your TDS is the PIT, plus heat and other debts like car or credit card payments.

Who are the insurers behind low down payment mortgages?

CMHC isn’t the only high ratio insurer for mortgages with low down payments, they’re just the one people talk about the most. We are lucky to have 3 providers for Insured Mortgages in Canada.

  • Homebuyer 95 at Sagen™ offers a 5% down payment option for the first $500,000 and 10% for balances up to $1 million.  
  • Downpayment Advantage™ at Canada Guaranty accepts 5% down for a one- to two-unit residence under $500,000 and 10% for any balance up to $1 million or multi-unit homes with up to four suites.
  • Flex 95 Advantage™ from Canada Guaranty lets you borrow the 5% down payment from a personal loan, credit line, or lender. CMHC, by comparison, only allows non-repayable gifts from immediate relatives. 

What’s Your Home Buying Strategy?

You’ve found a broker to work with, excellent news! Are you saving enough to afford a home? Try this 6-step home buying strategy:

  1. Pay debts first. Check your credit score.
  2. Track your spending and pay with cash. Credit cards use borrowed money. Cash is what’s in your wallet.  
  3. Spend less. Pick Netflix Canada over movies and factory outlets over trendy boutiques. You’re buying a home, not financing a lifestyle.
  4. Grow savings tax free. 
  5. Open, then borrow against your RRSP’s (you will have to pay this back). More on how to use an RRSP to buy or build a home. 
  6. Open a FHSA account. These are new as of 2023, and work like an RRSP except you don’t have to pay them back!

*5.49% is the current 5 year insured rate as of Aug 31, 2023. Subject to change at any moment.