What is mortgage default insurance?

 
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Mortgage or default insurance is required in Canada if you have a down payment of less than 20%. Industry insiders call these high-ratio mortgages. It is calculated as a percentage applied to your total mortgage amount. This insurance aims to protect the lender (not the borrower) if the borrower fails to repay the mortgage. The insurance premium cost is between 2.8% and 4.5% of the loan amount.

How does mortgage insurance change my home-buying budget?

Default insurance benefits you by reducing the required down payment:

Benefits

  • You can buy a home with as little as a 5% down payment if you’re a first-time homebuyer and 10% for everyone else.

  • Insured mortgages get lower contract interest rates than uninsured mortgages because the lender has more protection if the borrower defaults on the loan.

Challenges

  • The insurance premium cost is between 2.8% and 4.5% of the loan amount. You can finance the premium with the mortgage and thereby pay the fee over the lifetime of the mortgage; however, if you are borrowing the maximum mortgage allowable, then the money borrowed to pay the premium is money you can’t use to pay for a more expensive home.

  • The qualifying interest rate for insured mortgages is often higher than for uninsured mortgages, so borrowers qualify for a smaller mortgage. The qualifying rate is different from the interest rate you actually pay. CMHC (a government agency) defines the benchmark qualifying rate as the Chartered Bank Conventional Mortgage 5-year rate published by the Bank of Canada. Borrowers must qualify based on the published 5-year interest rate even if they choose a variable or 1 to 4-year interest rate.

  • Insured mortgages must be repaid within 25 years, while other mortgages can be repaid over 30 or even 35 years. Since they need to be repaid faster, their monthly payments are higher, meaning borrowers qualify for a smaller mortgage.

Can I shop around for cheaper mortgage insurance?

CMHC, Genworth, and Canada Guaranty offer mortgage insurance, but the premiums are set by CMHC (the government agency), so there is no competition on premium pricing.

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