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Mortgage Default Insurance

About Mortgage Default Insurance and Benefits to You

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:

  • 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 of fast-rising prices.
  • 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 down the drain, paying your landlord's mortgage not yours. Within one year, this rent money will easily exceed the cost of mortgage default insurance.
  • 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.
    

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.

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    How Default Mortgage Insurance Works

    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

    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.

    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 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.

    Example: Mortgage default insurance premiums

    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.

    Assumptions:

    • Mortgage amount: $165,000
    • Premium is added to the mortgage amount
    • Insurance premium rate: 1.80%
    • Amortization period: 25 years
    • Interest rate: 5%
    • Payment frequency: Monthly

    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%.

     

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