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

Metro Canada (Calgary) - - SPECIAL REPORT: MORTGAGES - Camilla cor­nell

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.

Pey­man So­heili

cris Lam re­ceived fi­nan­cial as­sis­tance from her par­ents to pur­chase a condo and avoid mort­gage in­sur­ance costs.

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