Getting Mortgage Default Insurance in Canada
Commonly known as CMHC insurance, mortgage default insurance is required by Canadian lenders for any down payment between the 5 percent minimum and 19.99 percent. In case a borrower fails to honour his or her loan commitment, mortgage default insurance will protect the lender.
It lets Canadians, who probably would not otherwise qualify to purchase a home, gain admission to the real estate game at a cost of between 2.8 percent and 4 percent of their mortgage amount. Interest rates on mortgage loans would rise without it, as the probability of default would go up. The risk of default is passed on to the insurer when mortgages are protected by insurance, enabling lenders to offer lower rates.
In order to be eligible for mortgage default insurance you must meet the following requirements:
- Your mortgage must span an amortization period of 25 years or less
- If the cost of the home falls between $500,000 and $999,999, you will need to make a higher down payment.
- A down payment of 20 percent or more is required for houses costing more than $1 million, and mortgage default insurance is not available for these homes.
Where Can I Get Mortgage Default Insurance?
The Canada Mortgage and Housing Corporation (CMHC) is the main provider of default insurance. You can also purchase mortgage default insurance from Canada Guaranty and Genworth Financial.
How Will My Mortgage Default Insurance Premiums be Paid?
Default insurance if paid through your mortgage. It doesn’t entail making a lump sum cash disbursement at the time you purchase your home, unlike closing costs such as land transfer tax and legal fees. Your default insurance is instead added to your mortgage amount and paid off over the life of your loan. For example, if your default mortgage insurance will cost 3 percent of your $250,000 mortgage, the revised amount you will pay is $250,000 + $7,500 = $257,500. In order to purchase your home, you will now need to borrow $257,500.
How Can I Pay Less for Mortgage Default Insurance?
You can pay less for mortgage default insurance if you increase your down payment when you purchase your home. Alternatively, you can buy a less expensive house. If you choose the first option, you may need to consider additional sources of funding your down payment, such as a tax-free withdrawal from your Registered Retirement Savings Plan, or asking a close family member for help.
There are 3 Mortgage Default Insurers in Canada:
- Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial Canada
- Canada Guaranty (formerly AIG United Guaranty)
Mortgage Default Insurance, commonly known as Mortgage Insurance, is required by Federal law for borrowers if their down payment less than 20% of the value of the property. Also, as a condition for obtaining a mortgage, a financial institution requires two kinds of insurance, mortgage default insurance and property insurance. There are other types of insurance, so for more information go to our article, What Type of Insurance is available for Home Buyers and 1st time home buyer mortgage.
Who does Mortgage Default Insurance protect?
This insurance provides an essential safeguard to the financial system and helps ensure the availability of mortgage funding during times of recession and economic downturns. The lender is protected should there be a default on the mortgage.
How does Mortgage Default Insurance help the homeowner?
Mortgage Default Insurance protects the lender, and as a result, allows borrowers with a low down payment to own a home they may not otherwise qualify for.
Each of the three insurers have an assistance program to help you should there be temporary financial hardship and if you qualify.
CMHC – Canada Mortgage and Housing Corporation
Mortgages insured by CMHC have access to a mortgage professionals who have tools and will work with you to find a solution to your financial situation. Some of the options include adding any missed payments to the mortgage balance and spreading them over the repayment period, special payment arrangements and more.
Genworth Financial Canada
Genworth offers a Homeowner Assistance Program that is designed to help homeowners who are experiencing temporary financial difficulties and in certain situations to seek help from their Homeowner Assistance Specialists. These specialists are trained in identifying the best workout solutions for you. If you qualify, Genworth has a number of options available.
Canada Guaranty has the Homeowners Solution Program for Canadians who find themselves experiencing unexpected financial difficulties. This program stresses the importance of the involvement of the lender and borrower at the first sign of financial distress. This program puts the onus on the lender. The Lender is the one that works with Canada Guaranty to find a workable solution for all concerned using a Canada Guaranty Loss Management expert.
How much does Default Mortgage Insurance cost and when do I pay the premiums?
Your Lender or Mortgage Broker will give you the exact cost of how much of an insurance premium you will pay on your mortgage, but typically premiums are based on your down payment and the percentage of the loan.
Premiums are paid in a lump sum or built into your mortgage payments.