Buying a house is the biggest investment for most people in their lives. If the down payment is less than twenty five (25%) of the purchase-price, there are two common ways of securing mortgage financing. Without knowing the advantages and disadvantages of the two types of financing could cost a bundle to a purchaser in terms of interest, broker’s fee and lender’s and renewal fees.
If you purchase a house with a down payment of less than 25 % of the purchase price it is commonly called High Ratio mortgage. A bank would finance only up to 75% of the purchase price without a mortgage insurance. High Ratio mortgage financing could be done in two ways.
First, assuming you have good credit rating and your income meets bank requirement, a bank could give you one mortgage for the balance of the purchase price (purchase price less down payment) provided your mortgage is insured usually with CMHC. Insurance is required, for in the event you default on your payment and your house is sold by the bank and the proceed of sale is less than the balance of your mortgage owing, CMHC would pay for the shortfall to the bank. As a purchaser, you would pay for the insurance premiums up to 3% of the amount of the mortgage or more depending on how much is your down payment. Getting only one mortgage could saves you interest expense because the interest is base on a first mortgage rate. Moreover, you can save other costs inherent with the second way of mortgage financing explains below.
Second, get a first mortgage from a bank up to 75% of the purchase price and arrange a second mortgage for the balance. You are not going to pay an insurance premium because the bank is amply secured on the first mortgage amount up to only 75% of the purchase price. However, you would pay higher interest on the second mortgage. In addition, you would also pay a lender’s fee, broker’s fee and additional lawyer’s fee for the preparation and registration of the second mortgage. Usually, your cost in getting a second mortgage is higher than the premium you pay for CMHC premiums.
To decide which type of financing is better for you, generally, the first (getting only one mortgage) is better than the second way (getting first and second mortgages) because the cost is less and the interest rate is lower. Unless you cannot qualify for one mortgage because of bad credit or low income or both, you have no choice but to get a first and second mortgages.
A month ago, a caller who got a wrong advice told me that he spent too much on his second mortgage and was to pay another broker’s fee, lawyer’s fee and lenders fee for the renewal of his second mortgage because second mortgages are usually for one-year term only.
Before deciding which type of mortgage financing you would get if your down payment is less than 25% of the purchase price, you have to do your homework to be sure you get the right financing. Calculate the cost: interest, legal fees, lender’s fee, broker’s fee, and cost of renewal for the second mortgage so you can save your money on unnecessary expense.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.