By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, March 26, 2023
Mortgage default insurance is commonly referred to as mortgage insurance. It is often mistaken for homeowner/property insurance or mortgage life insurance. Homeowner/property insurance protects your home and possessions in your home against damages and loss due to theft, fire, or other unforeseen disasters. Mortgage life insurance is designed to repay any outstanding mortgage debt in the event of your death or you develop a long-term disability.
There are two types of mortgage options available to homebuyers: Conventional mortgages, which are loans with a minimum 20 per cent down payment, and high-ratio mortgages, which are loans with less than 20 per cent down payment. Mortgage default insurance is in place to help you own a home if you are unable to save that 20 per cent down payment, which can be challenging in today’s housing market.
How it works
In Canada, mortgage insurance is required by the federal government on all high-ratio mortgages. The insurance protects the mortgage lender only against a loss caused by non-payment of the mortgage by you, the borrower, and it is not a protection for you as the homeowner. However, mortgage insurance enables you to purchase a home with a minimum down payment of five per cent if the purchase price is less than $500,000. If the purchase price is more than $500,000, you are required to put five per cent down on the first $500,000 and then 10 per cent on the balance. For example, if the purchase price is $650,000, then you must put at least $40,000 as the down payment.
Mortgage default insurance is provided by insurers such as Canada Mortgage and Housing Corporation (CMHC), Sagen (previously known as Genworth Canada), and Canada Guaranty. Each of these insurers has its own criteria for evaluating you and the property you wish to purchase, and it decides whether or not a mortgage can be insured. Plus, it’s the lender, not you the borrower, that selects the mortgage insurer. It is possible that the mortgage application can be approved by the lender but might not be approved by the insurer.
How it’s calculated
The mortgage default insurance premium is a one-time charge, and it is paid by you to the lender. It can be paid in a single lump sum at the time of closing, or it can be added to the mortgage amount and repaid over the amortization period (or the life of the mortgage). The cost of what you will pay is calculated by multiplying the amount you are borrowing by the default insurance premium, which typically varies between 0.60 per cent and 5.85 per cent. Premiums vary depending on the amortization period of the mortgage, the loan-to-value ratio, the size of the down payment, and the product.
It is important to note that for insured mortgage loans, the maximum purchase price or as-improved property value must be below $1 million. The borrowers can port the mortgage loan insurance from an existing home to a new home and may be able to save money by reducing or eliminating the premium on the financing of the new home.
Since there are different products available from individual lenders and are subject to a lender’s guidelines, speak with a mortgage expert to analyze your situation, present several options, and help you decide which product works best for you.