Before I jump into what Mortgage Loan Insurance (also known as Mortgage Default Insurance) is and whether or not you’ll need it when buying a home, first we need to understand what a Mortgage is.
What Is a Mortgage?
A mortgage is a loan that you use to buy a home. By signing a mortgage contract, you are agreeing to repay the loan, plus interest, within a specified period of time. Until that loan is paid off in full, your property continues to act as security for the lender in case you default on your payments. In other words, if you fail to make your payments as outlined in your contract, the lender can take possession of your home and eventually sell it.
This is where the lender is taking a risk. If the borrower (home buyer) defaults on the loan and the lender is then required to sell the home, the lender may be selling the property at a loss. That risk becomes greater for the lender the smaller the down payment is, therefore, the lender requires some type of security on high-risk loans (loans with down payments less than 20%), which is where Mortgage Loan Insurance comes in.
What Is CMHC*?
The Canada Housing and Mortgage Corporation (CMHC) is a Crown corporation that was originally established to help provide low-cost mortgages to World War II veterans by offering Mortgage Loan Insurance. Since that time, the CMHC has continued to provide security to lenders and housing opportunities to people who otherwise wouldn’t be able to qualify for a mortgage.
*Although there are other Mortgage Loan Insurance providers (Genworth Financial Canada and Canada Guaranty), CMHC is the most commonly known.
Who Needs To Have Mortgage Insurance and How Do I Pay It?
By now, you’re probably asking yourself, do I need to have Mortgage Insurance or not? In Canada, any down payment less than 20% of the value of the mortgage is required to have Mortgage Loan Insurance. It’s also worth noting that any property with a purchase price of $1,000,000 + requires a 20% down payment and therefore Mortgage Loan Insurance is unavailable for any properties over $999,999.
The premium for Mortgage Loan Insurance ranges from 2.80% – 4% of the mortgage amount, depending on the amount of your down payment. Rather than paying that amount as a lump sum, the Mortgage Insurance is added on to your Mortgage and is paid out over the period of the loan.
Purchase Price of your home: $ 500,000.00
Down Payment: $ 25,000.00
Mortgage Amount (Purchase Price less Down Payment): $ 475,000.00
Mortgage Insurance (in this example we’ll use 4% of $475,000): $ 19,000.00
Revised Mortgage Amount ($475,000 + $19,000): $ 494,000.00
If you’re curious to know how much your Mortgage Loan Insurance cost will be, try out this calculator to help. (RateHub, 2018)