If you are buying or refinancing a home 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 - not you!
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.
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.
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:
If you are currently renting because you want to save enough down payment to avoid paying mortgage default insurance, consider the following:
As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.
If you have less than a 20% down payment or existing equity when you refinance, you'll pay a non-refundable mortgage default insurance "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 many types of mortgage default insurance products, allowing you to buy a home with a very low down payment. For first time home buyers, mortgage default insurance can absolutely help you achieve your homeownership dreams. CMHC, Genworth, and Canada Guaranty insure mortgages, which are portable, assumable and assignable. Ask us more about the features and benefits of our mortgage default insurance products
Mortgage default insurance is provided by insurers such as:
Your lender will make the arrangements for the mortgage default insurance if it is needed.
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 3.85% of the borrowed amount.
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.
Paula’s down payment of $35,000 is 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.
The mortgage default insurance premium will cost $165,000 x 1.80% = $2,970
The total mortgage loan would then be $165,000 + $2,970.00 = $167,970
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 $2,218 in interest.
In total, Paula will pay an additional $5,187 because she did not save a down payment of 20%.