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About Mortgage Default Insurance

When you use mortgage default insurance to get a mortgage, lenders will loan you more money with as little as 5% down payment and give you their best mortgage interest rates.

About Mortgage Default Insurance and Benefits to You

If you are buying a house and are borrowing more than 80% of the home's value, federal law requires that the bank insure the mortgage against your default. That means if you fail to pay, the bank makes a claim on the insurance policy and therefore does not suffer a loss. It protects the bank and Canada's financial system.

The good news is that mortgage default insurance can make a big difference in how quickly your mortgage loan is approved and to the size of home you can afford. cmhc_logo-resized-600The largest mortgage default insurance provider in Canada is CMHC with 65% market share. CMHC is owned by the Government of Canada

Would mortgage default insurance apply to your situation? If you are trying to get a mortgage for your first (or next) home, then this is absolutely of interest to you. Here's why:

  • Lenders willing to offer mortgages even with a low down payment
  • Mortgage default insurance is a win-win solution for both home buyers and lenders.
  • Lenders rely on mortgage default insurance to protect themselves from financial losses in case a loan is not repaid.
  • Because lenders have this protection, they are willing to offer loans with very low down payments - as little as 5% of the loan amount - and with best rates.
  • Buy more house with a given down payment
  • For loans without mortgage default insurance, most lenders require a down payment of 20% of the purchase price - that's a lot of money, especially in today's housing market.
  • Mortgage default insurance allows you to start enjoying the benefits of homeownership when it is financially right for you.

If you are currently renting because you want to save enough down payment to avoid paying mortgage default insurance, consider the following:

  • Every month you rent, 100% of the rent money is going towards your landlord's mortgage not yours. Within one year, the sunk cost of your rent money will easily exceed the cost of mortgage default insurance (see the example at the bottom).
  • House values generally appreciate over the long term at 5% per year. That means a house you could buy today at $400K may possibly cost you $420K one year from now, exceeding the cost of the mortgage default insurance.
  • Here's a blog I wrote on Avoiding CMHC or Should You Care

Continued below - How Mortgage Default Insurance Works....

 
Mortgage-Default-Insurance

How Mortgage Default Insurance Works

If you have less than a 20% down payment for a home purchase you'll pay a non-refundable mortgage default insurance ("MDI") "premium" which can be added to your mortgage. This premium will be based on the percentage you borrowed of your home's total value. 

There are circumstances where - even though you have 20% of more down payment - MDI will still be required. MDI is a risk management tool for lenders, and makes them more likely to lend in rural areas as an example or in return for a lower interest rate.

In addition to first time home buyers and - contrary to popular belief - MDI and low down payment mortgages are also available to help repeat home buyers achieve their homeownership objectives. While one of the MDI providers (CMHC) only permits one insured-mortgage per borrower, a mortgage lender will choose from one of the other insurance providers in that event. 

Who offers mortgage default insurance?

Mortgage default insurance is provided by insurers such as:

  • Canada Mortgage and Housing Corporation (CMHC)
  • Genworth Financial
  • Canada Guaranty Mortgage Insurance Company.

Your lender will make the arrangements for the mortgage default insurance if it is needed. These insured mortgages are portable, assumable and assignable. Ask us more about the features and benefits of our many mortgage default insurance products

How much are the premiums?

The premium—that is, the cost of mortgage default insurance—will vary depending on the down payment: the bigger your down payment, the lower your mortgage default insurance premium. Usually, mortgage default insurance premiums vary from 0.6% to 4.5% of the borrowed amount (in 2019).

Here is a link to CMHC Mortgage Default Insurance Premiums.  Others will be similar.

The premium is normally added to your mortgage loan and included in your mortgage payments at the same interest rate you pay on the principal amount of your mortgage.

Some provinces apply provincial sales tax (PST) to mortgage default insurance premiums. Provincial taxes on premiums cannot be added to your mortgage loan. You must pay these taxes when your lender funds your mortgage.

Example: Mortgage default insurance premiums

Paula’s down payment of $35,000 represents 17.5% of the $200,000 purchase price of the home. Because her down payment is less than 20%, she will need to get mortgage default insurance.

Assumptions:

  • Mortgage amount: $165,000 or 82.5% of the purchase price (loan-to-value)
  • Premium is added to the mortgage amount
  • Insurance premium rate: 2.80% for LTVs up to 85% (2019)
  • Amortization period: 25 years
  • Interest rate: 5%
  • Payment frequency: Monthly

The mortgage default insurance premium will cost $165,000 x 2.80% = $4,620 added to the loan.

The total mortgage loan would then be $165,000 + $4,620 = $169,620

In addition to the cost of the premium, Paula will have to pay more in interest charges because the mortgage default insurance will increase the amount of her mortgage loan. Over the amortization period, the mortgage default insurance would cost her approximately an additional $3,481.94 in interest.

In total, Paula will pay an additional $8,103 because her down payment savings were less than 20%. Over 25 years, that is $27/month. In 25 years, her home will likely triple in value.

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