The average price for a home in Canada increased 17.1% in 2021, and that number is only expected to rise in 2022.
With house prices going up, it is getting more and more difficult to save for down payments. As a result, more buyers are opting for a down payment of 20% or less. But, what many buyers do not know is that when they make a down payment of 20% or less, they are required to pay mortgage default insurance every month.
What is CMHC mortgage insurance, and why do you need it? How much CMHC insurance can you expect to pay, and how do you pay it? We will answer these questions and more in this blog post.
What is Mortgage Loan Insurance?
Mortgage loan insurance, also called mortgage default insurance, is a type of insurance that is designed to protect lenders, not homebuyers. It protects lenders in the event that you default on your mortgage, unable to make your monthly payments.
Mortgage insurance is required when you make a down payment of 20% or less on a home. Insurance is typically required because loans that count for 80% or more of the purchase price are considered high ratio mortgages. This essentially means that the loan is riskier for mortgage lenders.
How Does Mortgage Loan Insurance Work?
Most homebuyers typically work with a mortgage professional at their financial institution when securing a home loan and insurance. But, lenders can only offer you the mortgage amount; they have to go through a mortgage insurance provider to secure coverage.
There are three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial.
While all three The CHMC is responsible for setting the standards for mortgage default insurance in Canada, no matter whether you choose the CMHC, Canada Guaranty, or Genworth Financial, all three providers will have the same standards and procedures.
What Mortgages Qualify for Insurance?
- A purchase price of less than $1 million
- A down payment of 20% or less
- A loan amount of 80% or higher of your purchase price
- The buyer intends to occupy the property, making it their primary residence
- A maximum amortization period of 25 years or less
- A total debt service ratio of 44% or less
- A gross debt service ratio of 39% or less
- A credit score above 600
Who Pays Mortgage Default Insurance?
How Much Does Mortgage Loan Insurance Cost?
Just like life insurance, mortgage default insurance is not free. Monthly insurance premiums will need to be paid to cover the cost of the insurance. And, much to many people’s disappointment, there is no one standard fee for your mortgage default insurance.
Your mortgage default insurance is calculated as a percentage of your mortgage and is based on your down payment amount.
Now you may be asking yourself, “Why does my down payment matter if all insured mortgages have a down payment of 20% or less?” You are right—all high ratio mortgages require mortgage default insurance because they are considered “risky” for lenders. But, some mortgages are riskier than others.
For instance, buyers that make a minimum down payment of 5% on a $400,000 home will have a loan to value ratio of 95% to 5%. Since 95% of the home’s purchase price is the loan amount, the loan is considered much more high-risk than other loans—even those with a mortgage balance worth 80% of a home’s value.
Buyers that have more paid upfront (even if they do not manage to afford the 20% down payment) will be deemed less risky than others who can only meet the minimum 5%. As a result, they will have lower insurance premiums.
Buyers should opt to make a larger down payment if they can afford it; a larger down payment can minimize mortgage default insurance premiums added to your mortgage amount.
Loan-to-Value and Standard Purchase Premium
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Loans with values up to and including 65% of the mortgage will have a standard purchase premium of 0.60%
- Loans with values up to and including 75% of the mortgage will have a standard purchase premium of 1.70%
- Loans with values up to and including 80% of the mortgage will have a standard purchase premium of 2.40%
- Loans with values up to and including 85% of the mortgage will have a standard purchase premium of 2.80%
- Loans with values up to and including 90% of the mortgage will have a standard purchase premium of 3.10%
- Loans with values up to and including 95% of the mortgage will have a standard purchase premium of 4.00%
How Do I Calculate Mortgage Default Insurance?
Before you purchase a home, you need to expect how much insurance will be added to your mortgage. While you may be able to afford your monthly mortgage amount and the added provincial sales tax, you also need to afford the added cost of mortgage default insurance.
As previously mentioned, CMHC insurance is calculated as a percentage of your loan and is based on the size of your down payment. The loan to value premium is calculated by dividing the mortgage loan by the purchase price.
We recommend that you use a mortgage default insurance calculator to calculate your CMHC insurance premiums to get an accurate estimate. The CMHC insurance calculator is a reliable choice for figuring out how much your monthly mortgage insurance premium will cost you.
Note: You may have to pay provincial sales tax on top of your CMHC mortgage insurance. Check with your lender before signing.
The Benefits of Mortgage Insurance
While you may not want to pay mortgage default insurance, it does come with many benefits. Read below to learn more about the benefits of mortgage insurance. You may realize just how helpful mortgage default insurance just maybe.
While you may not want to pay mortgage default insurance, it does come with many benefits. Read below to learn more about the benefits of mortgage insurance. You may realize just how helpful mortgage default insurance just maybe.
1. You can buy a house even with a small down payment
2. Get better mortgage rates with mortgage default insurance
3. CMHC insurance provides economic stability
CMHC Insurance vs. Mortgage Protection Insurance
CMHC insurance coverage offers coverage for financial institutions and lenders—not borrowers; if the borrower stops making payments on a CMHC insured mortgage, then the mortgage insurer will protect the mortgage lender.
Although CMHC insurance only protects lenders, borrowers do not have to go unprotected. Mortgage protection insurance helps protect people who borrow money to purchase homes.
Mortgage protection insurance, also called mortgage life insurance, can act like life insurance, disability insurance, and critical illness insurance all in one. If the borrower passes away or becomes unable to work due to a critical illness or disability, mortgage protection insurance pays off the entire mortgage amount or a portion of it. It is like mortgage life insurance!
Mortgage protection insurance offers direct coverage for your mortgage, unlike critical illness insurance, disability insurance, and life insurance which provide financial compensation to you or your beneficiaries. That is why it is highly recommended for those taking out a home loan, no matter whether you have a CHMC insured mortgage or not.
Secure Mortgage Protection Insurance Today
CMHC mortgage insurance is required on real estate purchases when the down payment is 20% or less, so why not trust a reputable insurance brokerage to secure protection for you?
Maple Bay Financial Corp. can help you secure mortgage life insurance on your next home purchase or insured mortgage renewal. Our brokers are knowledgeable, experienced, and prioritize your needs above all. You can trust that both you and your family members will be protected in case something unexpected happens.
Contact us today to learn more about our mortgage life insurance services!