Conventional wisdom says when you’re buying a home, a bigger down payment is always better. Not only will you lower your monthly payments by minimizing your debt, but a loan with a greater down payment offers more security for a bank. This should, in theory, make them more likely to lend.
Reality is a little different, however. Usually, folks with more than 20% down will get the same rates as those with a smaller down payment. Sometimes, though, people who put down less get even better rates.
Why would this be? It’s because of three little words. Mortgage. Default. Insurance.
In Canada, all mortgages with less than 20% down must have mortgage default insurance, insurance paid by the borrower that protects the lender in case of default. This insurance makes sure the lender doesn’t lose money on a deal that goes badly.
A part of the federal government, Canada Mortgage and Housing Corporation, is the largest mortgage default insurer.
Once this insurance is in place, a bank has very little risk involved. A deal without mortgage insurance-- one with more than 20% down-- becomes more risky. Thus, that borrower has to pay higher rates.
Yes, a borrower will pay a premium for mortgage insurance, which can range from 1.25% to 3.60%. But that fee is only applied once, and could mean an annual interest savings of 0.25% or 0.50%, which means it could very well end up cheaper in the long run to pay for mortgage default insurance.
