Buying a new home as a first time home buyer can be a overwhelming experience and there can be lot of questions regarding that mortgage loan process especially about mortgage default insurance. Let’s understand if you really need to pay for it.
What is Mortgage default insurance?
It is also known as CMHC insurance, is obligatory in Canada for all mortgages with a down payment less than 20% (minimum requirement is 5% in Canada). It protects the lender if in case the borrower defaults.
What are the benefits?
The mortgage default insurance helps Canadians getting home ownership.
· Home buyers (especially first time home buyers) with minimum down payment can be home owners.
· Lenders can offer better interest rates as there is insurance to protect them in case of a default.
· Mortgage insurance can be transferred from one property to another to save cost of premium.
· It protects the homeowner in case of any job or income loss or out of work & is not able to pay monthly mortgage payments.
What are the Requirements?
· The maximum amortization for insured mortgages is 25 years.
· If the purchase price is between $500,000 - $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.
Note:Mortgage insurance is not available on homes purchased for more than $1 million & a 20% down payment is required in this case.
Premium Calculations
There is a one-time insurance premium calculated as a percentage of the total mortgage loan amount. The percentage of premium varies based on your down payment starting 5% to 19.99%.
The insurance premium cost usually gets included in the mortgage loan amount and then in the monthly mortgage payments and protects the mortgage lenders in case of default.
Who offers mortgage default insurance in Canada?
There are three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.
Factors affecting insurance premiums
The mortgage default insurance premium can be affected by one or more of these factors:
· With the CMHC Green Home program - up to 25% of refunds are available directly to borrowers who buy, build or renovate for energy efficiency using CMHC-insured financing.
· Portability feature - saves money for repeat users & reduces or eliminates the premium on the new insured loan for the purchase of a subsequent home.
· A conversion surcharge of 0.30% is applied - if the application is converted from a traditional to a non-traditional down payment.
· Some of the provinces (Manitoba, Ontario, Quebec & Saskatchewan) apply provincial sales tax to the premium.
How do you pay mortgage default insurance?
Unlike the closing costs (Legal fees, land transfer tax etc.) the Mortgage default insurance premium can be added to your mortgage loan amount & get financed.
How to minimize mortgage default insurance?
To minimize the mortgage default insurance:
· Increase the amount of down payment
· Purchase a less expensive home
Although it is mandatory to have mortgage default insurance in some cases but still need to keep a few things in mind:
· With mortgage insurance, everyone pays the same premium. Unlike the life insurance there are no discounts for being a non-smoker or healthy
· You continue to pay the same price for insurance against the declining value of mortgage loan.
· Unlike the life insurance – the beneficiary is the bank/lender
Although mortgage default insurance costs home buyers but it allows Canadians to be a homeowner with a minimum down payment of 5%.
Note: The amount & type of insurance depends upon individual needs & always make sure it is sufficient for your family needs. Make sure to consider Life, disability and critical illness insurance.
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