Understanding Mortgage Default Insurance
When a customer purchases a home with less than a 20% down payment, the Government of Canada requires the mortgage to be insured against default. This type of insurance protects banks and lending institutions from mortgage default.
Who provides default insurance?
This type of insurance is offered by a number of different insurers and are provided through your mortgage lender which could be a bank or a Mortgge Company. This is provided by a number of Insurers such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada (GE) or another approved private insurer.
Who pays?
If you require default insurance, your lender (Bank or Mortgage Lending Company) will arrange for you to purchase the mortgage default insurance at the time you take out your mortgage. The cost of the insurance is a one time charge and may be paid at that time or added to your mortgage balance. You would also be charged all applicable government sales taxes, which must be paid up front.
Who is covered?
It is important to understand that the insurance provides protection to the mortgage lending institution only and not to the homeowner.
How is the cost determined?
The cost of default insurance is calculated by multiplying the amount of funds that are being borrowed by the default insurance premium, which typically varies between 0.5% and 6.5%. Premiums vary depending on the amortization period of your mortgage, and a ratio based on your mortgage amount and the size of your down payment.1.
How do I know what premium to use?
To determine your premium you will first need to calculate your loan-to-value (LTV) ratio. LTV can be calculated by dividing the amount of the funds being borrowed by the value of the property (which is the lower of the purchase price and appraised value). If your mortgage amortization extends beyond the traditional 25-year amortization period, a premium surcharge is applied. Examples of mortgage default insurance premiums can be found at http://www.cmhc-schl.gc.ca/.
| Examples | ||
|---|---|---|
| Property value: | $250,000 | $250,000 |
| Down payment | 5% or $12,500 | 5% or $12,500 |
| Mortgage loan | $250,000 – $12,500 = $237,500 | $250,000 – $12,500 = $237,500 |
| Amortization | 25 years | 30 years |
| Loan-to-value ratio | $237,500/$250,000 = 95% | $237,500/$250,000 = 95% |
| Premium | $237,500 x 2.75%2 | $237,500 x (2.75% + 0.2%3) |
| Default Insurance cost | $6,531.25 | $7,006.25 |
