What is the implication of having a down payment of less than 20% in a loan?

Having a down payment of less than 20% when securing a mortgage typically requires the borrower to obtain insurance from the Canada Mortgage and Housing Corporation (CMHC) or similar insurers. This insurance provides protection to the lender in the event the borrower defaults on the loan. It is designed to mitigate the higher risk associated with lending to borrowers who have a smaller equity stake in their home.

Since a down payment signifies the borrower’s initial investment in the property, a lower down payment means the lender has a higher risk exposure. The insurance premium adds a cost to the overall mortgage, which can be rolled into the mortgage itself but must be factored into the cost of borrowing.

The other options do not capture the reality of the situation; for instance, the necessity of insurance arises directly from the down payment being less than 20%. Hence, the requirement for CMHC insurance is a key aspect of financing a home with a smaller down payment and is crucial for both lenders and borrowers to understand.