Posted on: 15-11-06 17:27:17
Has anyone explored this ? It's a common practice in the US to reduce the amount paid on Mortgage Loan Insurance for High ratio mortgage.
Here, by law your supposed the get this type of insurance if you pay less than 25 % of the home's price as down payment.
I checked on this with my Mortgage consultant, and he does not recommend it as it will add the up cost, but he did not give me any good numbers, so I am not sure he is working towards my best interest or the banks.
Here's the scenario.
If the home price is say $300k and I am willing to make a 10% down payment.
I take a mortage from Bank A for 75% of the homes purchase price, say...$225,000, then CMHC insurance will not have to be taken.
I then take a second mortgage from the same Bank or another Bank for 15% of the purchase price of the home, say...$45,000 and since this less than the required 25% downpayment, I then have to take the CMHC insurance, but in this case I only pay for 2% of the 45,000 as the premium.
I hope I am making sense.
According to the mortagage consultant I am dealing with, this is legal, but it seems the Schedule A banks, will not give the same customer a second loan and that I would have to go to other types of lenders, who would typically charge 8 or 9 % interest. Not sure how much this is true.
So I would like to hear from others here on this topic.
Quote:
Originally posted by navin2004
Has anyone explored this ? It's a common practice in the US to reduce the amount paid on Mortgage Loan Insurance for High ratio mortgage.
Here, by law your supposed the get this type of insurance if you pay less than 25 % of the home's price as down payment.
I checked on this with my Mortgage consultant, and he does not recommend it as it will add the up cost, but he did not give me any good numbers, so I am not sure he is working towards my best interest or the banks.
Here's the scenario.
If the home price is say $300k and I am willing to make a 10% down payment.
I take a mortage from Bank A for 75% of the homes purchase price, say...$225,000, then CMHC insurance will not have to be taken.
I then take a second mortgage from the same Bank or another Bank for 15% of the purchase price of the home, say...$45,000 and since this less than the required 25% downpayment, I then have to take the CMHC insurance, but in this case I only pay for 2% of the 45,000 as the premium.
I hope I am making sense.
According to the mortagage consultant I am dealing with, this is legal, but it seems the Schedule A banks, will not give the same customer a second loan and that I would have to go to other types of lenders, who would typically charge 8 or 9 % interest. Not sure how much this is true.
So I would like to hear from others here on this topic.
This is legal but not many lenders would give you CMHC insured 2nd mortgage. Those who do would charge you interest of any where from posted rates + 1% to posted rates + 2%. This arrangement might not make much sense for people who would not be able to pay this 2nd mortgage in a couple of years. However, those who feel that they would be in a position to pay this 2nd mortgage in 1 or 2 years they may get benefited by this.
Let's take your example.
The house cost is $300,000 and you put 10% ($30,000) as down payment.
CMHC insurance would be $5400 and you would have to pay 8% tax of $ 432.
Now let's suppose that you take a first mortgage of $225,000 and do not pay any CMHC insurance premium. However, you pay 2% premium of $900 on the 2nd mortgage of $45,000. The 8% tax on this premium $72.
Let's also suppose that both the mortgage you take are for a 5 year term.
On your 1st mortgage you get the best discounted rate. However, on the 2nd mortgage of $45,000 you pay extra of 2.5% rate for 5 years. Even with the diminishing balance, you could end up paying over $5000 in interest on the 2nd mortgage alone. Add to it the insurance premium and taxes and the lawyer's fee for registering extra mortgage (around $500) and you have a total cost of more than $6,500 which is more than what you would have paid if you got 90% loan from the first bank.
Also it is not sure that every one would be able to pay this 2nd mortgage in 5 years. And if they can not pay it in 5 years than the total carrying cost of this 2nd mortgage would be much more.
Hence as mentioned earlier it would make sense only if you take this for a short term of 1 or 2 years.
I hope it clarifies and makes sense...............
-----------------------------------------------------------------
Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
