Mortgage Default Insurance (also known as Mortgage Insurance), allows home buyers to buy their dream home with a low down payment.
There are two types of mortgage options:
- conventional mortgages - mortgage loans with a min. of 20% down payment
- high-ratio mortgages - mortgage loans with a less than 20% down payment
With ever increasing home prices – it’s challenging for most Canadian to come up with 20% of Home price. But, with help of Mortgage Default Insurance, Canadians can buy home with as low as 5% down payment.
In Canada, mortgage insurance is needed for all high-ratio mortgages (Less than 20% Down Payment).
There are three companies provide mortgage insurance in Canada:
Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, and Canada Guaranty.
As a home buyer or a borrower, generally you will not have any contact with the mortgage insurance companies as your lender decides & choose the company. Each mortgage insurance company will have its own criteria and decides accordingly.
How It Works
This insurance protects the lender in case the borrower defaults on the mortgage.
The cost (premium) of mortgage insurance depends on two factors:
· type of mortgage
· amount of the down payment
The premium is charged to the lender who, in turn, passes the cost of the premium onto the borrower, which typically range from 0.5% to 2.9% of the total mortgage amount.
The lower the down payment is, the higher the premium. A mortgage insurance premium can be paid in a lump sum upon closing or can be added to the mortgage and paid out over the lifetime of the mortgage.
Criterion for Mortgage Default Insurance
To get mortgage loan insurance, you’ll need a minimum down payment. The amount depends on the home’s purchase price:
· If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
· If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.
· If the home costs $1,000,000 or more, mortgage loan insurance is not available.
Exceptions
There are exceptions where the mortgage insurance is either not applicable or eligible.
- Any investment property will not be eligible for mortgage insurance and need at least 20% down payment.
- Any property worth more than $1 Million
- Amortization period of mortgage loan must be less than 25 years. In some cases, the lender may ask for the mortgage insurance even if you have more than 20% down payment.
Mortgage default insurance lets you buy your dream house with only 5% down and get a mortgage for up to 95% of the purchase price of a home, with a reasonable interest rate.
It also helps stabilize the housing market as it ensures the availability of mortgage funding & lowers the risk of the lender.
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