Mortgage insurance is a policy that protects lenders against financial loss when borrowers default on their mortgage payments. While many homebuyers view it as an unnecessary expense, understanding mortgage insurance is crucial for anyone planning to buy a home in Canada, especially with a down payment of less than 20%.
Consider a $400,000 home purchase, sounds like a dream price for Toronto, eh? With a traditional 20% down payment, you'd need $80,000 upfront. However, with mortgage default insurance, you might only need 5% ($20,000), making homeownership more accessible while protecting the lender against the increased risk of default.
In Canada, mortgage default insurance is mandatory for high-ratio mortgages (down payment less than 20%). The Canada Mortgage and Housing Corporation (CMHC) outlines three main providers:
Key features of Canadian mortgage default insurance include:
In countries like the United States, borrowers may encounter different types of mortgage insurance:
These options are not applicable in Canada, where mortgage insurance specifically refers to mandatory default insurance for high-ratio mortgages.
The cost of mortgage default insurance in Canada is primarily based on the down payment amount and the loan-to-value (LTV) ratio. The insurance premium increases as the down payment decreases. Here's a breakdown of the premium rates:
For example, if you're purchasing a $400,000 home with a 5% down payment, the premium would be calculated as follows:
Home Price: $400,000
Down Payment: 5% ($20,000)
Mortgage Amount: $380,000
Premium Rate: 4%
Premium Cost: $15,200
The premium can either be paid upfront or added to the mortgage, increasing the loan amount to $395,200.
While often seen as an additional cost, mortgage default insurance offers several advantages:
In Canada, mortgage default insurance is tied to the mortgage for its full term and cannot be removed. However, once you refinance or renew, and your loan-to-value ratio drops below 80% or equity reaches 20%, you may no longer need this insurance.
Is mortgage default insurance the same as homeowners insurance?
No. Mortgage default insurance protects the lender if you default, while homeowners insurance protects your property against damage and loss.
Does mortgage default insurance protect me?
No. It only protects the lender if you default on your loan.
Can I switch mortgage insurance providers?
No. The insurance provider is chosen by your lender.
Are there different types of mortgage insurance?
Yes, but only Mortgage Default Insurance is applicable in Canada. Other types, like PMI or FHA Mortgage Insurance, exist in countries like the United States but do not apply to the Canadian market.
Mortgage default insurance, while an additional cost, makes homeownership accessible to Canadians who cannot make a 20% down payment. Understanding its requirements, costs, and benefits can help you make informed decisions about your home purchase and mortgage strategy. In addition, while you navigate your home-buying journey, don't forget to consider the protection your home deserves. Begin Insurance offers comprehensive home insurance coverage to safeguard your property and belongings. Get in touch with one of our expert brokers today or get an instant quote below:
About the author Sean Graham:
Sean Graham has been an insurance broker in Ontario for over 20 years. He is considered a pioneer in the digital insurance space and has been featured on CTV’s Canada AM, CBC, City TV, AM 640, Newstalk 1010 and Toronto Star. In 2014 he was named one of Canada’s Top 10 brokers under 40. Sean believes strongly in putting the consumer at the center of everything the business does. He is also an advocate for fostering the next generation of insurance talent through education and mentorship.
Posted Jul 4, 2019