Avoiding mortgage insurance By building up your down payment, you can avoid those fees
I know it’s not trendy, but why not ask your parents — who may be downsizing in the future — to start thinking of what can happen if you get your pre-inheritance now to purchase your future home
When Cris Lam bought her preconstruction condo in 2014, she was in the enviable position of having a big enough down payment to avoid mortgage default insurance fees.
Why would she want to avoid insurance, you ask? The simple answer: because mortgage default insurance is really intended to protect the lender, not the homeowner. It ensures if you default on your loan, the bank, trust company or other lender will get its money anyway.
Avoiding the insurance — sold by either Canada Mortgage and Housing Corp. (CMHC) or Genworth — can save the average homeowner a significant amount of cash over time. Fees rose in March for the third time in the last few years, as part of new regulatory requirements that stipulated CMHC and Genworth had to hold more capital to offset risks in the country’s booming real estate market.
For example, if the average price of a house is $730,472 (as it was in Toronto last year), according to the CMHC’s premium calculator, if you make the minimum down payment on that home of $48,048 and opt to have the CMHC premiums added to your mortgage, you’ll pay more than $27,000 over the life of your mortgage. That’s nothing to sniff at.
You can avoid those fees and cut down on your interest payments as well by building up your down payment. Here’s how:
Lam’s secret weapon was her parents. In 2013, they sold the family home, giving Lam, her sister and her brother $200,000 each to purchase a home of their own.
They even sweetened the pot, boosting Lam’s share by $30,000 so she could live on the eighth floor of her condo building — “Chinese lucky number 8.” Lam says she and all of her siblings are so grateful for the support. “I know it’s not trendy, but why not ask your parents — who may be downsizing in the future — to start thinking of what can happen if you get your pre-inheritance now to purchase your future home?” she suggests.
Note that mortgage lenders may ask for a signed ‘gift letter’ indicating the money doesn’t have to be repaid and specifying the amount, who is offering the cash and their relationship to the recipient.
Even with her parents’ contribution, Lam needed a financial planner’s help to ensure she was debt-free and had spare cash to cover all the additional costs of home ownership.
She met with Victor Godinho, a financial planner with Pangea Personal Financial Planning, who analyzed her spending and delivered some hard truths. “Do you realize you’re blowing $800 a month on food?” he asked her.
“I was caught up in the downtown lifestyle,” she says. Lam invested in cooking classes and now designates Sunday as prep day for the week. She also replaced dog-walking fees with a doggy daycare to save money.
You get a raise and you immediately decide you can afford to go out for dinner three nights a week.
Personal finance blogger Barry Choi (moneywehave.com) developed a goal-oriented budget with his (then) fiancée Carla Salvosa. Initially, they focused on saving for the big day. “After the wedding, that money that was being saved for the wedding was now being saved for home down payment,” says Choi. Take on a side business or a part-time job, as Choi did with his blog. Within the first two years of its launch, he generated an extra $5,000 towards a down payment on a condo and continues to earn a regular income.
cris Lam received financial assistance from her parents to purchase a condo and avoid mortgage insurance costs.