Mortgages can be a risky business, which is why mortgage default insurance exists.

When it comes to the getting a mortgage, mortgage default insurance has benefits for both the lender as well as for the homebuyer: the mortgage insurer promises to protect the lender’s investment in the event that the homebuyer defaults and stops making their mortgage payments, and this guarantee means that the homeowner is likely to get approved for a much larger mortgage than they would if there was no guarantee to the lender. In short, the insurer is assuming the bulk of the risk so that the lender doesn’t have to.

Qualifications

Not all mortgages are eligible for mortgage insurance, however, so you may not be about to count on it when filling out your mortgage application.

In order to qualify for mortgage insurance, you have to have a down payment that’s less than 20 per cent of the purchase price of the property. In fact, if you have less than 20 per cent for a down payment, then you are required to get mortgage default insurance by law if you’re working with a federally regulated lender. Any mortgage with a down payment of 20 per cent or more is considered a low-ratio mortgage and probably doesn’t need insurance – although there are some exceptions for different types of properties, and investment properties can be a different beast altogether. If you’re buying a home worth more than $1 million, then you won’t be eligible for mortgage insurance.

Mortgage default insurance not only allows people to buy homes with a smaller down payment, but it also evens the playing field and gives buyers the chance to get interest rates comparable to buyers who have large down payments.

Most mortgage insurance has a built-in portability feature, so if you sell your property and move elsewhere, you can transfer the insurance to your new home.

Mortgage insurance premiums

You can’t talk about insurance without talking about insurance premiums. When you get mortgage insurance, your lender will pay the insurance premium directly to the insurance provider, but the cost of the premium gets passed onto you. Many people opt to roll it into the mortgage, but doesn’t have to be. If it is rolled into the mortgage, you will make one mortgage payment to your lender that combines the principal and interest of the mortgage with the mortgage default insurance premium. If you choose not to combine them, then the premium can be paid as a single lump sum, due at the time of closing.

How much is the premium? Depends – the mortgage default premium is calculated as a percentage of the loan and is based on the type of mortgage and the size of your down payment. The higher the percentage of the total house price relative to the value that you borrow (also known as the loan-to-value ratio, or LTV), the higher percentage you will pay in insurance premiums.

In 2017, Canada’s largest insurer of mortgages, Canada Mortgage and Housing Corporation (CMHC), increased its homeowner mortgage loan insurance premiums. It estimates that homeowners with CMHC-insured mortgages will pay somewhere around $5 more per month.

Who provides mortgage insurance?

There are three providers of mortgage default insurance in Canada. The biggest by far is CMHC. CMHC is a crown corporation, which means that it is owned by the state, but operates as a private entity. So CMHC reports to Parliament through a Minister, and is governed by a Board of Directors, which is accountable for the overall corporate governance of the Corporation. The Board of Directors is responsible for managing the affairs of the Corporation and the conduct of its business in accordance with the Canada Mortgage and Housing Corporation Act, the Financial Administration Act, and the National Housing Act.

The other two national mortgage insurers are private-sector competitors, Genworth Canada and Canada Guaranty. Each company sets their own rules when it comes to the types of mortgage that they insure and their requirements for those mortgages. Although CMHC has the lion’s share of the mortgage insurance market, the other companies provide the same service and they’re fairly similar for the most part. This is one area of the home buying process where it doesn’t really pay to do your research; even if you want to go with one insurer over another, if you need mortgage insurance, you almost certainly won’t have a choice as to which provider will insure your mortgage. Your lender makes that decision, and since they get paid by the lender directly, you won’t even know who insures your mortgage unless you ask.

What mortgage insurance isn’t

Mortgage default insurance is not mortgage life insurance (although the confusion is understandable, given that they’re both referred to as mortgage insurance). Mortgage life insurance is a product offered by some lenders that will pay off your mortgage in the event that you die. Both insurance products offer protection, but mortgage life insurance protects anyone else on your mortgage from having to pay off the balance of the mortgage alone, while mortgage default insurance protects your lender from losing money should you become unable (or unwilling) to make your mortgage payments.

This isn’t Monopoly, and mortgage default insurance isn’t a Get Out of Jail Free card. Let’s say that you stop making mortgage payments and are unable to keep up with them anymore or work out an agreement or payment plan with your lender. Depending on where you live, your lender is forced to begin foreclosure or Power of Sale proceedings in order to sell the home and recoup their losses. If your lender is unable to get the money owing them from the sale of your home, they would then file a claim with the mortgage insurer. The insurer pays the lender, but that isn’t the end of the story; the insurer then has the right to come after you for the money that they’ve paid back to the lender.

Buy or avoid?

It’s always nice to have extra money in your pocket, so if you don’t have to pay for mortgage default insurance, it stands to reason that you wouldn’t want to. In other words, if you have a 20 per cent down payment ready to go, then it makes sense that you would want to use it for the purchase as opposed to only paying, say 10 per cent and then needing to get private mortgage insurance.

On the other hand, if you are convinced that getting onto the property ladder as soon as possible is the way to go, and you think that property values in your area are going to increase faster than your ability to save up enough money to make it to 20 per cent for a down payment, then mortgage insurance will be a necessary tool for your home purchase. Without it, you’d be forced to either pay a very high interest rate and/or go to a lender that isn’t as tightly regulated.

For most people, the questions isn’t whether or not you want to get mortgage insurance, it’s whether or not you have to do so based on when you want to buy a home.

Related stories:

Mortgage insurance premiums rising
Saving for a down payment may be a challenge for first-time buyers

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