Mortgage Default Insurance - What it is and when you may need it.
By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, August 20, 2022
Mortgage default insurance is commonly referred to as mortgage insurance. It is often confused with homeowner/property insurance or mortgage life insurance. Homeowner/property insurance protects the individual’s home and possessions in the home against damages and loss from theft, fire, or other unforeseen disasters. Mortgage life insurance is designed to repay any outstanding mortgage debt in the event of the homeowner’s death or long-term disability. Mortgage default insurance, however, increases a homebuyer’s opportunity to purchase a home with a low down payment, since saving for a 20 per cent down payment can be difficult in today’s housing market. To clarify, there are two types of mortgage options: 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. In Canada, mortgage insurance is required by the government of Canada on all high-ratio mortgages. The insurance protects the mortgage lender only against a loss caused by non-payment of the mortgage by the borrower, and it is not a protection for the homeowner. However, the mortgage insurance enables borrowers 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 put at least $40,000 as the down payment.
WHERE DO YOU GET MORTGAGE DEFAULT INSURANCE?
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 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, and it’s possible that the mortgage application can be approved by the lender but might not be approved by the insurer.
WHAT IS INVOLVED
The mortgage default insurance premium is a one-time charge, and it is paid by the borrower to the lender. The premium 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 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. The borrowers can transfer 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, 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.