Are you a new buyer entering the housing market this year? You’ll need to learn about mortgage default insurance! There are many costs associated with buying a home, but this is one that might slip some buyers’ minds. However, it’s very important to keep mortgage default insurance top of mind when buying a home, because it can have a big impact on your mortgage. Here’s what you should know about mortgage default insurance before you jump into the market.
What is mortgage default insurance?
Mortgage default insurance exists to protect lenders who finance mortgages for borrowers with less than a 20 per cent down payment. In general, it’s assumed that smaller down payments create riskier mortgages. Of course, this isn’t always true, but it makes up the foundation of the case for mortgage default insurance.
The default insurance premium is added to the total mortgage amount so it isn’t an out of pocket expense for the borrower at the time the home is purchased. The default insurance is protection for the lender. It ensures lenders do not lose the money they invested in the borrower in the event the borrower defaults on their mortgage and can no longer make payments.
Who needs it?
In Canada, home buyers must provide a down payment of at least five per cent of the property’s purchase price, up to a maximum of $500,000. If the home’s purchase price exceeds $500,000, buyers must contribute at least five per cent on the first $500,000, then 10 per cent on the remaining amount. Homes over $1 million must have a down payment of 20 per cent of the entire purchase price.
If you’re buying a home and have chosen to contribute less than 20 per cent for your down payment, you will need mortgage default insurance. This insurance is mandatory for all buyers who do not pay that 20 per cent upfront. Since smaller down payments are seen as a bigger risk for lenders, this insurance provides them with extra protection.
Who provides it?
There are three providers of mortgage default insurance in Canada. The Canada Mortgage and Housing Corporation (CMHC) is the largest provider in the country, and this insurance is often simply called CMHC insurance. However, there are two private insurance companies, Canada Guaranty and Sagen (previously Genworth Financial Canada), who can also offer this insurance.
For the most part, the regulations and costs of this insurance are the same between all three providers. The main difference is CMHC is publicly owned, while Canada Guaranty and Sagen are private companies.
Is it worth it?
If you’re thinking about buying a home and are unsure about your down payment size, you must consider your options. Mortgage default insurance may be the best option for some buyers, but not for others. Obviously, contributing a 20 per cent down payment means you can avoid paying this insurance altogether. This will save you extra fees, and be one less thing to worry about. On the other hand, today’s housing prices can make it challenging to save up a full 20 per cent down payment. By contributing a smaller down payment, you can likely enter the market and buy a home earlier, as long as you understand the extra costs that come with this decision. In general, you should expect the price of this insurance to be between three to four per cent of your mortgage amount.
If you’re hoping to enter the market sooner, and are struggling to save up 20 per cent for a down payment, mortgage insurance may be a good option for you. If you’re comfortable waiting a bit longer to save so you can dodge these fees, that’s a great choice too. You need to consider your saving abilities, and your willingness to pay extra for insurance, before you enter the market.
Speak to a broker!
Feeling unsure about what route you should take in terms of mortgage default insurance? Make sure you contact a broker like myself! We can meet to discuss your down payment amount, your saving schedule, and how insurance may alter your finances. Brokers can help you paint a picture of your different options and how each would look. We can assist you as you decide which path is best for you.
Mortgage insurance can be a bit confusing. There’s a lot to learn about it before you decide if it’s right for you. That’s why we recommend reaching out to us early! By learning how mortgage insurance might fit into your life, you can enter the market with confidence.
If you have any questions about your mortgage, get in touch with me!