A federal law that lowers the level where mortgage insurance is required came into effect Friday, and bankers say the change could save many would-be homebuyers $2,000 or more.

For the last 40 years, homebuyers have been required to buy mortgage insurance from CMHC or another insurer unless their down payment equalled at least 25 per cent of the purchase price.

With a down payment of at least 20 per cent, mortgage insurance will no longer be required.
(CBC)

One of the changes in Bill C-37 is to cut the requirement for mortgage insurance to purchases with a down payment of less than 20 per cent.

The effect of that change is that at least 10 per cent of buyers will now not have to buy insurance, BMO Bank of Montreal vice-president Cid Palacio told CBC News.

Based on a home price of $300,000, a buyer with a 20 per cent down payment can save about $2,500 on insurance premiums, she estimated.

Because three- or five-year insurance must be bought at the time of purchase, the saving comes when buyers are under the most financial pressure.

Some customers have been scrambling to meet the 25 per cent requirement to avoid the insurance premium, Palacio said.

"This often means that they are dipping into their credit cards or rainy-day savings to make up the difference."

While the change makes it easier to buy a house, BMO Bank of Montreal has not changed its risk assessments, she said.

Because the federal change happened Friday, the bank will extend any savings to customers whose mortgages closed that day.

RBC Royal Bank carried out a survey in anticipation of Friday's change. It found that lowering the down-payment requirement for mortgage insurance from 25 per cent to 20 per cent would make about  one in five prospective homebuyers more likely to buy a home.

"We've immediately implemented this lower down-payment limit," said Catherine Adams, RBC Royal Bank's vice-president of home equity financing.

"These savings can add up to approximately $2,000 for a client with a typical $200,000 mortgage over 25 years, on a home valued at $250,000," she said.