By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, November 30th , 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 its contents against damages, including loss, theft, fire, or other unforeseen disasters. Mortgage life insurance is designed to repay any outstanding mortgage debt in the event of your death or long-term disability.
Mortgage default insurance increases purchasing opportunities for anyone who has a low down payment, since saving for a 20 per cent down payment can be difficult in today’s housing market. If you are looking to purchase a home, there are two types of mortgage options: Conventional mortgages, which are loans with a minimum of a 20 per cent down payment; and high-ratio mortgages, which are loans with less than a 20 per cent down payment.
In Canada, mortgage insurance is required by the federal government for all high-ratio mortgages. The insurance protects the mortgage lender (for example, a bank) only against a loss caused by non-payment of the mortgage by you, the borrower, and it is not a protection for you. However, the 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 on the first $500,000 and 10 per cent on the balance. So, for example, if the purchase price is $650,000, then you must have at least $40,000 as the down payment.
Mortgage default insurance is provided by insurers such as the Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. Each mortgage insurer has its own criteria for evaluating the borrower and the property, and it decides whether or not a mortgage can be insured. The lender, not the borrower, selects the mortgage insurer. So, it is possible that the mortgage application can be approved by the lender but might not be approved by the insurer.
The mortgage default insurance premium is a one-time charge, and it is paid by you to the lender. The premium can be paid in a single lump sum at the time of closing, or it can be added to your mortgage amount and repaid over the amortization period (i.e. the life of the mortgage). The cost of default insurance is calculated by multiplying the amount of the funds that are being borrowed 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. You can port the mortgage loan insurance from an existing home to a new home and you 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 lender’s guidelines, it is important to talk to a mortgage expert who can analyze your situation, present several options, and help you decide which product works best for you.
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