Do you want to buy a home now instead of waiting for years to save the 25 percent down payment that Canadians have traditionally considered ideal? Many first-time buyers now opt to accelerate their entry into the housing market by carrying a larger mortgage -- with the federal government's endorsement.

The Canadian government allows, and promotes, residential mortgages of up to 95 percent of home value, provided the lender is protected from losses by mortgage insurance.

According to Canada's National Housing Act, mortgages for more than 75 percent of the appraised value of the home require mortgage insurance to protect lenders should the borrower fail to repay the mortgage debt, that is, default on the mortgage. The federal agency Canada Mortgage and Housing Corporation (CMHC) and the private lender GE Capital Mortgage Insurance Company (Canada), the only two suppliers of mortgage insurance in Canada, both promote 5 percent-down-payment programs. In 2000, CMHC alone supplied mortgage loan insurance to allow more than 145,00 households to buy a home.

GE Capital Mortgage Insurance offers a private, corporate alternative to the government program and its competitive approach appeals to lenders and real estate professions that look for accelerated transaction speed and ease of access. Consumers may see little difference between these two insurance lenders since buyers concentrate on premium rates, which don't differ.

Borrowers may pay the one-time mortgage insurance premium as part of their closing costs, but most usually add the premium to the mortgage debt. Premium rates depend on the size of the mortgage as a percentage of the purchase price. The premium rate varies from 0.50 percent to 3.75 percent of the mortgage principal, depending on the size of the down payment. For instance, with 5 percent down payment and a mortgage that finances 95 percent of the purchase price, the premium is 3.75 percent of the entire mortgage balance, while financing of 85 percent to 90 percent carries a premium rate of 2.5 percent.

To calculate the premium, multiply the mortgage amount by the premium rate. For example, a $100,000 mortgage, which represents 86 percent of the value of the home, would carry a premium of $2500.

The amount you can borrow depends on a lender's evaluation of your ability to repay or service the mortgage debt. Servicing the debt means repaying the amount borrowed and paying the interest due on the outstanding balance. Lenders use a calculation called the Gross Debt Service (GDS) Ratio to decide what they will lend you.

The lender sets its GDS ratio at value from 28 percent to 32 percent, depending on the lender's criteria and market conditions. This means that the total of mortgage payments (that's the combined principal and interest payments), property tax and heating costs must be less than this amount. If you are buying a condominium, 50 percent of the condominium fees will be added to the calculation of monthly costs.

Not all legitimate income-earning sources will be given equal consideration by some lenders. For instance, commissioned sales income and rental income from an illegal apartment may not be included in your gross amount, thus reducing the size of the mortgage you'll qualify for.

Lenders usually combine GDS with another calculation to ensure that your overall debt situation is under control. The Total Debt Service (TDS) Ratio, usually set at about 40 percent, includes all your monthly payments such as a car loan or credit card payments, but not life insurance premiums.

Don't think that the 5 percent solution is a free ride to home ownership. If the premium is added to the mortgage and amortized for repayment over 20 or 25 years, the eventual cost may be doubled or even trebled. Carrying a high-ratio mortgage means large monthly payments which can leave the homeowners feeling house-rich and cash-poor, especially since heating costs and property taxes are increasing noticeably each year.

In some cases, arranging a first mortgage for up to 75 percent of the purchase price and then a second mortgage for the balance may be a less expensive alternative. The cost of arranging a second mortgage and perhaps paying a higher interest rate on that mortgage may be less than the premium on one large mortgage. Do the math and talk to your real estate salesperson before you decide.

For more articles by P.J. Wade, please press here.

Published: April 17, 2001

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Futurist and Strategist PJ Wade is "The Catalyst" -- intent on "Challenging The Best Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life. Author of 7 books and more than 1600 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy... Your Choice! (CatapultPublishing.com), which is filled with suggestions and insight on protecting and using home equity. Her new business book, "What's Your Point?," which identifies 7 common mistakes professionals unknowingly repeat to their detriment, will be published in 2009. As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors -- and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking -- a talent she regularly demonstrates in this column. For more on blogs, books and topics, visit TheCatalyst.com.