As a first-time homebuyer, chances are you’ve never heard of mortgage default insurance. More often than not, it isn’t until you’re sitting across from your lender that you learn about this expensive requirement. You see, in order to qualify for certain types of mortgage products in Canada you are required to be “insured”. While most insurance products are designed to protect your dependants in the case of an unexpected accident, mortgage default insurance actually protects your lender if ever you are unable to make your mortgage payments. It’s a strange concept for many property virgins, but one that should be discussed early in the homebuying process.
What is Mortgage Insurance?
Mortgage default insurance is a guarantee to your lender. The insurer of your mortgage guarantees the bank or lender that they will not lose any money on the mortgage, provided the lender and the mortgage holder adhere to certain criteria.
Don’t Confuse Mortgage Insurance With…
- Property Insurance: This type of insurance protects the property (and possessions within the home) against damages like theft, loss, fire, and other unexpected disasters.
- Mortgage Life Insurance: This coverage is designed to repay any outstanding mortgage debt on your property in the event that the homeowner dies unexpectedly or is severely injured resulting in a long-term disability.
Do I Need Mortgage Insurance?
It’s worth noting that mortgage insurance isn’t applicable to all lending agreements. For example, if you have a sizable down payment of 20% or more, you will not be required to purchase this coverage. Mortgage insurance is only required under the following circumstances:
- If the down payment is less than 20% of the home’s purchase price.
- If the home is located in an isolated area. This may cause a lender to classify your home as a risk for resale.
- If a great deal of the mortgage is withdrawn from a registered retirement savings plan (RRSP) as part of the Home Buyers’ Plan.
How Mortgage Insurance Can Help
In some cases, mortgage default insurance can actually help first-time home buyers take a step up the property ladder. This is because it enables consumers to buy property with a lower down payment. In fact, qualified borrowers can purchase a home with as little as 5% down, provided they meet all of the necessary requirements.
How Much Does Mortgage Insurance Cost?
Mortgage insurance is provided by two primary organizations in Canada: the Canada Mortgage and Housing Corporation (CMHC) and GE Capital Mortgage Insurance Canada. Both companies base their insurance rates on a percentage of the home’s value, as well as your down payment. Currently, CMHC offers three insurance premium levels:
- 1.75% for down payments between 15% and 20% of the purchase price
- 2% for down payments between 10% and 15% of the purchase price
- 2.75% for down payments between 5% and 10% of the purchase price
CMHC also charges an additional premium for mortgages that are amortized over a period of 25 years or longer. For example, if you amortize your mortgage for upwards of 30 years, you will be assessed an additional 0.2%. For mortgages amortized over a period of 30 to 35 years, the surcharge doubles to 0.4%.
Mortgage insurance can be pricey, but it’s not all that bad. Remember: without this insurance coverage you might not be able to purchase your home at all! Mortgage insurance is designed to help unlock the door to your dream home as soon as possible.
If you’re worried about mortgage insurance fees, or are unsure as to whether or not you require this additional coverage, speak with a mortgage broker. A qualified mortgage broker can help you achieve the best mortgage rate for your situation, as well as help you navigate the ins and outs of mortgage default insurance. What’s more, a mortgage broker may also be able to recommend private insurance options to help alleviate your costs.