What is it?
Mortgage default insurance is a mandatory insurance in Canada for those who purchase their homes with less than a 20% down payment.*
The insurance is put in place to protect lenders in the event that a borrower defaults on their mortgage. The insurance premium is paid for by the borrower(s) and added to the principal of the mortgage loan. We have three main providers in Canada: Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Sagen.
How is it calculated?
Your mortgage default insurance premium will be calculated as a percentage based upon how much you are borrowing in comparison to the total value of the home. Therefore, the larger your down payment, the lower your premium will be, and vice versa.
A step-by-step calculation example for you
Let’s use a home with a $650,000 purchase price, and a minimum down payment of $40,000.
$40,000 (down payment) ÷ $650,000 (purchase price) = 0.0615 or 6.15% (down payment percentage). A 6.15% down payment puts you in the 90.01% to 95% loan-to-value range for a 4.00% premium.
650,000 (purchase price) – 40,000 (down payment) = 610,000 (mortgage before insurance).
$610,000 (mortgage before insurance) x 4.00% (premium on total loan) = $24,400 (insurance premium).
Your mortgage insurance premium of $24,400.00 will be added to your $610,000 mortgage for a total of $634,400.
What else should I know?
There are some requirements that come with insured mortgages:
A maximum amortization period of 25 years.
The property must be under $1,000,000.
You must have a minimum down payment; 5% on properties of $500,000 or less, and for properties over $500,000, 5% on the first $500,000 and 10% on the remaining portion up to a maximum purchase price of $999,999.
Here’s a few more tidbits if you would like to learn more
If you do have 20% or more of the purchase price to use as your down payment, your lender can still choose to get back end insurance coverage and cover the cost on their own.
Generally, insured interest rates are lower than non-insured rates (#winning), as insured mortgages are less risky for lenders.
This insurance helps buyers get into the market without having to save up a 20% down payment which could take several years.
To learn more about the insurance providers, visit www.cmhc.ca, www.canadaguaranty.ca, or www.sagen.ca.
*Some lenders may still require a borrower to pay for mortgage default insurance even with a down payment of 20% or more in certain situations. For example, if the borrower is qualified under a special program that is deemed to be a higher risk, or if the property is in a remote location, etc.
As always, I'm happy to help with any questions you might have. Give me a call, anytime.
Nadia
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