As a Canadian looking to buy a home, you’ll soon learn that mortgage default insurance is likely something you’ll need, especially if you plan to make less than a 20% down payment. By law, Canadian banks can only provide mortgage financing to qualified homeowners with at least this minimum down payment, unless the mortgage is insured against default. While it doesn’t seem like a lot of money, 20% can add up to a huge amount depending on what kind of home you’re looking for, where you’re located and what your local market dictates. Learn more about the value of having mortgage default insurance and what is really means from the buyer’s perspective.
What Is Mortgage Default Insurance?
To put it simply, mortgage default insurance protects your lender in case you ever “default” on the mortgage – in other words, if you fail to make your payments as promised when you signed your paperwork at closing. It’s important to note that this coverage won’t protect you as the borrower. Its purpose is to lower the lender’s level of risk by providing something to fall back on if you don’t hold up your end of the bargain with payments. Any mortgage in Canada that has less than a 20% down payment will require mortgage default insurance.
To qualify for mortgage default insurance, you’ll need to keep these things in mind:
- You need to have an amortization period under 25 years.
- You have to make a higher down payment if the purchase price is $500,000-$999,000.
- If you purchase a home over $1 million, you won’t have mortgage default insurance, as a minimum 20% down payment is required.
Some other requirements include:
- Gross debt service ratio of 35% or less
- Total debt service ratio of 42% or less
- Credit score of at least 680
- Won’t qualify if you borrow money for your down payment
How Does Mortgage Insurance Work?
If a borrower “defaults,” it’s the insurer’s job to oversee all legal proceedings and payment enforcement. They’ll also work to compensate the lender if there are any shortfalls after the property has been sold and all expenses have been paid. This means that if your property needs to be sold to pay back the lender but the amount falls short, the mortgage default insurance benefit will have you covered. The defaulting borrower (also known as you as the buyer) will remain responsible for any shortfall on the mortgage, and the lender or mortgage insurer may still pursue you for any deficiency following the sale of the property. If you find yourself in this position or approaching it, consider speaking with a licensed insolvency trustee.
It’s also important to note that mortgage default insurance may also be referred to as CMHC Insurance since the Canada Mortgage Housing Corporation (CMHC) is the largest provider of this insurance in Canada. Genworth Financial Canada and Canada Guaranty are the two other mortgage default insurance providers you’ll come across as well.
How Much Is Mortgage Insurance?
As with most insurance policies, there’s a “premium” or cost associated with it. The total cost you’ll owe is calculated by multiplying the “rate” of the insurance by the amount being borrowed. The rate is set by the mortgage default insurers and depends on how large your down payment is (what percentage), relative to the price of the home.
Want to minimize your cost? Make a larger down payment, or if that’s not an option, consider purchasing a less expensive home. Keep in mind that as of July 1, 2020, CMHC underwriting changes state that you won’t qualify for CMHC coverage if you choose to borrow money for your down payment, unless doing so puts you over the 20% threshold, which in turn means you won’t need mortgage default insurance at all.
How To Calculate Mortgage Default Insurance
You’ll need four figures to ensure you calculate your mortgage default insurance cost accurately: the total house value, your down payment amount, your insurance premium and the chosen amortization period.
Step 1: Calculate your down payment as a percentage of your home price
(down payment / home value).
Step 2: Calculate your mortgage amount
(home value – down payment).
Step 3: Calculate your mortgage insurance premium
(mortgage amount x insurance premium).
How Do You Pay For Mortgage Default Insurance?
Mortgage default insurance is financed entirely through your mortgage. Unlike your land taxes or closing costs, you won’t be expected to pay it out in a large sum of cash when you purchase your home. The total cost is added to your mortgage and paid off over the lifespan of your loan.
If you’re in the market for a new home, it’s important that you’re aware of all the costs you may encounter during the buyer’s journey. As with most financial decisions, having a plan in place and understanding your options from the start can have a big impact on your experience. You want the home buying experience to be a fun and exciting adventure, not a super stressful one. Take the time to create a budget and look at your finances so you aren’t surprised by any unexpected costs or unfamiliar processes before you dive in.
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Looking to learn more about mortgage default insurance or the home buying process in general? Reach out to our team for help!