First of all, what is mortgage default insurance?
Mortgage default insurance (also known as mortgage loan insurance, or simply mortgage insurance) was put in place to help Canadian home buyers purchase a home with less than 20% down while allowing the lender or bank to safeguard their loan, should the buyer need to default on their payments after purchasing. Mortgage insurance protects your lender in the result that you can’t pay your mortgage and default on the loan.
How do I qualify for mortgage insurance?
Yes, you read that correctly. You need to meet certain requirements to qualify for mortgage default insurance. That’s part of the reason why 5% is considered the absolute minimum down payment someone can make on a property. Anything more than 20% you don’t need mortgage insurance, and anything below 5% you can’t get it, as you’ll read below.
Under current CMHC rules, you would have to provide a minimum down payment of 5% on the first $500,000 and 10% on the rest of your purchase price.
The current average house price in Canada is around $750,000. We will use this price as an example to breakdown the down payment requirement and default insurance cost below.
Purchase Price: $750,000
Minimum Down Payment: $50,000
(5% on first $500,000 = $25,000, + 10% on additional $250,000 = $25,000)
Mortgage amount: $700,000 + CMHC Insurance Premium $28,000 = $728,000
(based on 93% Loan to Value with a 4% premium (see chart below)
Amortization: 25 Years
Why would someone need this?
For many Canadians, saving up a 6 figure down payment is simply not feasible. An insured mortgage allows home buyers to purchase a home with as little as 5% down. The down payment must come from saved resources or from a gift from an immediate relative, and cannot be from another loan. Quite simply, you’ll need mortgage insurance if your lender is requiring you to get it, which will happen if you’re putting less than 20% down on your home.
Who typically gets mortgage insurance?
Mortgage default insurance is typically for people purchasing homes in Canada with a down payment of less than 20%, and is not for refinances. Default insurance is also available for rental properties, newcomers to Canada, portable mortgages, and construction financing projects. Mortgage default insurers are Canada Mortgage Housing Corporation, Sagen (formerly Genworth), and Canada Guarantee.
So what are the pros and cons of getting mortgage insurance?
Default Insurance coverage – if you can no longer make your mortgage payments, your lender has coverage. This is great for your lender, which means they might require it for you to be approved on your mortgage.
Shorter Amortization – standard amortization of 25 years is applied, allowing you to pay off your mortgage sooner.
Lower rates – insured mortgages can have slightly lower rates than non-insured mortgages. This will depend on your lender.
Flexible payment options – The premiums can be paid up front in a lump sum or blended in with your mortgage loan payments
Additional approval steps – Getting mortgage insurance requires insurer approval after lender approval. Your lender will need to seek approval through an insurer after your application has been taken. The insurer will look at the full application and the property details of the home you have purchased. This means more time spent in the approval process, and potentially another chance for your application to be denied, though if your mortgage lender already approved your mortgage it’s unlikely an insurer wouldn’t do so as well.
Home price limit – The purchase price of the home must be less than $1M. Insurance is not available for purchases exceeding this amount.
Fees – Of course, the biggest downside of insurance is the fees, which is paid by you, the borrower. This fee is added to the mortgage balance to be paid over the term of the loan. The common insurance firms CMHC, Sagen, and Canada Guaranty follow this price matrix:
|Loan-to-Value||Premium on Total Loan||Total fee on a 500,000 loan|
|Up to and including 65%||0.60%||$3,000|
|65.01% to 75%||1.70%||$8,500|
|75.01% to 80%||2.40%||$12,000|
|80.01% to 85%||2.80%||$14,000|
|85.01% to 90%||3.10%||$15,500|
|90.01% to 95%||4.00%||$20,000|
If you’re curious about your monthly payments, our mortgage payment calculator includes mortgage insurance for mortgages that require it.
In today’s market, mortgage default insurance can be helpful in allowing you to purchase a home without having to put down 20% of the purchase price. The premium being rolled into the mortgage balance is also a good option to save costs instead of having to pay it upfront. It’s always best to work with your mortgage advisor to map out each option and see what you qualify for under high ratio (insured) and conventional (uninsured) if you can save up a larger down payment.
At Perch, we have dedicated mortgage advisors who can work with you to determine the best move. We also have the ability to offer you the best rates you qualify for from a number of different lenders.