A common question we receive surrounds what mortgage default insurance is and does. Here, we talk a bit more about default insurance and why it is required in some cases when getting a mortgage.
What is mortgage default insurance?
Default insurance works in two ways. First, it gives the lender confidence that they will recover their investment in the event of default. Second, it provides borrowers that cannot afford a 20 per cent down payment the opportunity to purchase a home and qualify for competitive interest rates.
Mortgage default insurance is provided by the three national insurers; these insurers are CMHC, Genworth, and Canada Guaranty. Mortgage default insurance is typically paid for as a lump sum that is added to your mortgage. The amount you pay in insurance premiums is usually a fixed percentage of your mortgage amount based on down payment tiers. This tiered system leads to premium rates from 0.6 per cent to as high as 6.6 per cent of the mortgage amount, according to the CMHC. You can view the CMHC premium table here.
Do I have a choice?
Mortgage lenders often roll the default insurance premium into your mortgage. This might seem cost-effective at first glance, but you will end up paying more over the life of the mortgage. If you are able to contribute a larger down payment, you might benefit from increasing this to 20 per cent. By doing so, you can avoid the additional default insurance fees.
To simplify, you do not have a choice if you cannot come up with a 20 per cent down payment. You may also require default insurance in certain other situations. But if you have the resources available, or a generous relative, you can save some money by avoiding this altogether. Your unbiased mortgage professional can help you weigh your options and determine what down payment is right for your financial goals. For some, It might make sense to wait and save a larger down payment. For others, it might be worth the premium. You may also be able to recover up to 25 per cent of the default insurance premium if you buy an energy-efficient home or make efficient upgrades to your home. You can find out more information about the refund here.
Insuring for the future
Mortgage default insurance provides security for the lender and can help you if you are unable to come up with a 20 per cent down payment. This is fairly common with most things finance. If you are unable to reduce the risk with a higher down payment, the lenders will accommodate by requiring you to pay these insurance premiums. It is one of the necessary trade-offs in becoming a homeowner. It is important to have a good understanding of your financial goals to make sure you are making decisions that lead to the best possible outcome.
Mortgage default insurance lasts for as long as you’re financing your home. This insurance is also transferable if you refinance or renew it with a different lender. However, understanding your financial goals is important. For example, if you are looking to flip your property in a few year’s time, this added cost will reduce the profitability of your investment. This is why it’s important to have a trusted partner that will work with you to plan your financial future.
It all starts with your mortgage broker!
If you are unsure whether to increase your down payment or settle for default insurance, you should reach out to a mortgage broker. A mortgage broker will clarify any questions you have and will be able to set you up with the best financial plan for you and your goals.
If you are planning on buying a home or would like a second opinion on your mortgage, feel free to get in touch with me here!