How Is Mortgage Insurance Calculated?

There are two types of mortgage insurance. Both may be added directly to your mortgage payments, but they serve two very different purposes and are calculated differently. You may have one or both, depending on your circumstances.

Mortgage default insurance will be mandatory for you if you are applying for a mortgage and are making a down payment of less than 20% on it; this is insurance to protect your lender in case you default on your payments. Mortgage life insurance is optional insurance you choose, to protect yourself and your family, which will pay your mortgage in full if you pass, or pay monthly mortgage payments temporarily, for specified circumstances.

Mortgage Default Insurance

A down payment is the amount of money that a person saves up to buy a home. The remainder needs to be borrowed, in the form of a mortgage. Home buyers whose down payment on a house is under 20% of their home’s purchase price will need to purchase mortgage default insurance. This is because the mortgage loan is considered to have a high loan-to-value ratio.

A down payment can be as low as 5% for homes that are priced under $500,000. For homes with a purchase price between $500,000 and $999,999, the down payment must amount to 5% of the first $500,000 and 10% of the remainder of the purchase price. However, the lower the down payment amount, the higher the loan-to-value ratio, so these are called high-ratio mortgages.

If a home buyer can make a down payment of 20% or higher, mortgage default insurance is not mandatory. However, for all high-ratio mortgages – ones where the home buyer does not have a down payment of at least 20% of the purchase price of the house – mortgage default insurance is mandatory.

Why Is Mortgage Default Insurance Mandatory?

In situations with high ratio mortgages, the home buyers do not own enough of the house; they have not paid off enough of what they owe on it with their down payment, so they only truly own a small percentage of it.

In the case of a 7% down payment, 93% of the house is mortgaged (borrowed), and not actually owned by the home buyer. This creates a higher lending risk for the bank or financial institution.

In cases like these, there is a greater chance that the borrower might stop paying the monthly mortgage payments, also known as defaulting on them. If the property has also dropped in value due to market trends or other factors, and the lender has to foreclose, or take back, the devalued property, the lender will have lost money.

Who Insures the Banks or Financial Institutions?

To reduce the risk of losses from these types of mortgages, the lender will take out mortgage default insurance. It may do this through one of three organizations.

Canada Mortgage and Housing Corporation (CMHC) mortgage loan insurance is one option. Often referred to as CMHC Insurance, this is a government-owned, Canadian crown company offering. CMHC insurance used to be the most popular option, but the two other choices, offering private mortgage default insurance, Sagen (which used to be known as Genworth Financial) and Canada Guaranty are becoming more common.

The costs incurred from a mortgage insurance premium are paid by the borrower.

Qualifying for Mortgage Default Insurance

First, however, the borrower must qualify for mortgage default insurance. You will need to meet your lending institution’s requirements. In addition, the borrower needs to meet minimum requirements from the insuring company.

As of 2020, CMHC insurance requires a credit score of at least 680, a gross debt service ratio below 35% and a total debt service ratio over 42%.

The private mortgage insurance companies have slightly easier standards, with a credit score of 600, a minimum gross debt service ratio of 39% with a minimum total debt service ratio of 44%.

The TDS ratio is the percentage of income that goes towards housing costs and other debts, while the GDS ratio is the percentage of income that goes toward housing costs only. A maximum amortization of 25 years is also mandatory.

Mortgage Insurance Premium Calculations

The mortgage default insurance premium cost will be a percentage of your mortgage loan amount. It will range from 2.8% to 4.0% of your mortgage amount.

The higher your home’s purchase price is, the more of that amount that you are borrowing will impact the mortgage default insurance premium percentage.

For loan-to-value ratios up to and including 85%, a 2.80% premium will apply. For loan-to-value ratios up to and including 90%, a 3.10% premium applies. For loan-to-value ratios up to and including 95%, a 4.00% premium is added.

You can pay mortgage default insurance premiums in full at the start of your mortgage, or monthly payments can be made along with your regular monthly mortgage payments.

In addition to the calculated mortgage insurance premium, Ontario (8%), Quebec, and Saskatchewan charge provincial sales tax on the premium. Ontario charges 8%, Quebec charges 9%, and Saskatchewan charges 6%.

Mortgage Life Insurance

Mortgage life insurance, also called mortgage protection insurance, is optional.

There are variations in this mortgage insurance coverage. Some mortgage protection insurance plans only cover if an insured person passes away, in which case, the mortgage is paid off in full, with the money going to the lender. Others include coverage for critical illness, job loss, or disability, covering monthly payments for up to two years, in most cases.

The bank or financial institution offering the mortgage will usually offer this mortgage insurance, but better rates may be found with a third party insurance company. An insurance broker is helpful to find the best rate.

The insuring company calculates mortgage protection insurance premium rates based on factors such as the age and some health-qualifying questions; again, shopping around can help in finding better rates.

Questions About Rates?

If you have questions about mortgage insurance or mortgage protection insurance rates, Shelter Bay can help.

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