Understanding Mortgage Insurance and CMHC
Do I really need mortgage insurance?
A down payment acts as a form of security – so the larger your down payment, the better. If you have a greater amount of equity built up in your home, unforeseen circumstances can be more easily managed, and you’ll be less likely to default on your mortgage.
Lenders typically group low mortgage rate shoppers that have a deposit between 5 – 20 percent of the home purchase price into the “slightly higher risk” category. In order for the lender to protect against this increased risk, mortgage default insurance is required.
Best mortgage rate shoppers used to be able to secure 100 percent financing in Canada until October 2008 when the government stopped insuring zero down payment mortgages in an effort to avoid a U.S. style housing crisis.
What is Mortgage Default Insurance?
Default Insurance, also known as mortgage loan insurance, provides protection to the mortgage lender. The lender typically requires this form of insurance for mortgage loans with a down payment of less than 20%.
As of July 9, 2012, any Canadian mortgage rate requiring default insurance is capped at an amortization period of 25 years. This means 30-year mortgages are only a possibility for those putting more than 20 percent down (referred to as a conventional mortgage).
In the event that you default on your mortgage, the lender will go through the process of collecting the outstanding amount on the loan. If the outstanding loan is still not fully paid off after selling the home, then the insurer will provide the difference back to the lender.
Where do I get Mortgage Default Insurance?
This form of insurance is supplied by the government organization Canadian Mortgage and Housing Corporation (CMHC), as well as private insurers.
What Will it Cost Me?
When the lender insures the loan, they pass the insurance premium to the homeowner. The premium is a percentage of the mortgage value based on your Loan-to-Value ratio (LTV). It can be paid in a single lump sum or it can be added to your monthly mortgage payments. To calculate your Loan-to-Value ratio, take the mortgage amount and divide it by the property value.
Advantages of Having Default Insurance
It’s a win-win situation for both the lender and potential homeowner as it protects the lender and the borrower. The lender can offer that same great mortgage products and rates to borrowers that are at a slightly higher risk of default.
Disadvantages of Having Default Insurance
It allows a homeowner to purchase a property with a small down payment – this means they have little value in their home and they will end up paying more interest on the home loan. If the homeowner wants protection they need to purchase additional mortgage insurance.