What is Mortgage insurance? Mortgage default insurance protects lenders in the event a borrower ever stopped making payments and defaulted on their mortgage loan. It is is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. When you put less than 20% down, you’re considered a high-risk/high-ratio borrower because you don’t have as much equity in your home as other buyers, and your risk of default is higher.
Mortgage Insurance allows you to secure a mortgage for up to 95% of the purchase price of the home. You will also have access to low interest rates as the risk to the lender is reduced by Mortgage Insurance being in place.
How Mortgage Insurance works
Mortgage Insurance varies based on the size of your down payment in comparison to the purchase price of the property that you’re buying. The lender of your choosing is forced to pay an insurance premium on mortgage loan insurance. Therefore the lender will likely pass this cost on to you. You can either include it in your mortgage amount borrowed, or pay for it upfront at closing. Here’s the breakdown, and please note that the premium is based on the mortgage amount borrowed.
|Down payment percentage||Premium|
|5% to 9.99%||4%|
|10% to 14.99%||3.1%|
|15% to 19.99%||2.8%|
Also note that certain times when properties can’t be insured. They are:
- Rental properties
- Homes priced at $1 million or more
- Mortgage amortization over 25 years
There are also instances when a buyer putting more than 20% is required to buy insurance. For example if the property is located in a remote area, or rural area.
Your lender will apply for mortgage default insurance from one of three providers. The most common one is the Canada Mortgage and Housing Corporation (CMHC), a government-run organization that’s also the national regulator for mortgage insurance and premium pricing. The other two providers are private insurers Genworth Financial and Canada Guaranty. They almost always use the same pricing and criteria set by the CMHC.
Many times clients will confuse Mortgage Insurance with Mortgage LIFE Insurance. These two products are extremely different. Mortgage Life Insurance is an insurance purchased separately that in the case of death your mortgage balance will be paid off. It is usually purchased alongside Disability Insurance, which takes effect if you get injured, and cannot keep up with your payments.
Mortgage life insurance
Mortgage life insurance isn’t required, but it’s something your lender might recommend you purchase. This insurance will pay off your mortgage balance in the event of you or your partner’s death. And you may also have the option to add disability or critical illness coverage. It is best to speak with a Insurance specialist leading up to the purchase of your new property, and highlight the amount that you’re borrowing. They’ll then be able to recommend the best solution to keep you and your loved ones safe in case of an accident.
If you have any questions in regard to this article, please do not hesitate to contact me. All the best,