When Do You Need Lenders Mortgage Insurance (LMI)?

Posted by Justin Havre on Tuesday, February 6th, 2018 at 8:08am.

Understanding How LMI WorksLenders Mortgage Insurance (LMI) is available to Canadian buyers who are unable to meet the suggested minimum down payment of 20% on the purchase of their home. As savings dwindle and home prices rise, LMI is becoming a much more common occurrence, as prospective homeowners are not able to put together the money they need to place 20% down on a property. Yet there are still buyers unsure of exactly how it works and what it means for their future finances. See how this will all play out with your lender if you don't have quite have enough to cover the ideal down payment.

The Background

The idea behind this special type of insurance is to protect the lender in case the buyer is unable to pay their mortgage. In the case of a 20% down payment, the buyer builds up a substantial amount of equity and the lender gets a significant break on how much money they have to part with. Anything less than 20% and the lender will take out insurance to cover the loan in case of default. In addition, the lender will usually insure the home for more than the buyer paid for it. This is to protect themselves from depreciation, real estate agent's fees, and closing costs.

What It Means for Buyers

The lender is going to be paying the insurance company for their policy, but they'll be passing down the costs of that policy to the buyer. But LMI is a way to protect the market as much as it protects the lender, so it's not all bad news. LMI halts rising interest rates in their tracks by putting the burden on those most likely to default on their loans.

While this may seem unfair, there are a few benefits that buyers should be aware of. For instance, it won't hurt a buyer's financial status or credit score to take out LMI, and it usually means that interest rates stay relatively comparable to buyers who were able to put down 20%. Plus, buyers stop paying for LMI entirely when they achieve 20% equity from their mortgage payments. If the buyer chooses to refinance though, LMI will likely need to be paid all over again.

What a Buyer Owes

LMI can be anywhere from 2.8–4% of the borrowed amount of the home, with the payments typically tacked onto the monthly mortgage payments. The total amount paid will be based on the lender used, so it's important to do some research on their rates and processes before choosing one. Some lenders may make it difficult or cumbersome to cancel LMI.

LMI is not available for homes that are worth a million or more, nor are they available for mortgages that last more than 25 years. In the case of a home sale worth between $500,000 and $999,999, buyers will be expected to put down at least 5% of the first $500,000, and then at least 10% on the remaining amount. So in the case of a $550,000 home, buyers would need to have $25,000 for the first half a million and $5,000 for the remaining $50,000 (for a total of $30,000 as a down payment.)

Taking advantage of LMI is often the only way that buyers can afford the home they want, whether they live in Shannon Lake or elsewhere, but it's clear that it will cost a buyer a lot over time. If you're set on the home of your dreams, the best advice is to put as much money as possible toward the mortgage until you can comfortably get out from under the LMI payments.

Justin Havre

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