Mortgage Default Insurance - What Is It?
The many benefits of homeownership do not come without their costs. Purchasing a home is likely to be one of the largest transactions you ever make, and the more knowledge you have about the costs associated with a home purchase, the better your position will be when it comes time to search for your dream home. When speaking with clients, a question that is asked frequently is whether Mortgage Default Insurance is required on their purchase. To help those who are currently in the market for a home, or might be searching for a home in the future, below are some guidelines to consider when factoring Mortgage Default Insurance into your purchase.
What is Mortgage Default Insurance?
Many borrowers may think mortgage default insurance is in place to protect them. This is not the case, however; Mortgage Default Insurance, also referred to as CMHC insurance, is in place to protect the lender in the case that the borrower defaults on the loan. Everyday mortgage lenders take risks loaning mortgagees like you and I money to purchase homes. To mitigate these risks, mortgage default insurance, and guidelines as to when it is required, have been put in place to act as a safety net in the case of default. This does not mean you are off the hook if you fail to pay your mortgage. Although mortgage default insurance may be in place, Lenders will still come knocking to recoup any remaining loan balance or fees incurred if a default were to occur.
When is it required?
In Canada, Mortgage Default Insurance is required on high-ratio mortgages, or mortgages where the borrower is applying less than a 20% down payment on a home purchase. More specifically, for down payments between 5%-19.99%, mortgage default insurance will be required, and is not optional through conventional lenders. What’s more, when it comes to mortgage default insurance the down payment requirement is also affected by the value of the home. For home values up to $500,000, the minimum required down payment is 5%, for home values greater than $500,000 up to $1 million, an additional 10% of the difference is required. For example, a $750,000 home would require a minimum down payment of $50,000; ($500,000 x .05) + ($250,000 x .10) = $50,000 or 6.7% total down payment.
What is the cost?
Mortgage default insurance is calculated as a percentage of the overall mortgage loan amount. The percentage used is based on a sliding scale that factors in the amount of downpayment to be applied. In most situations, the following percentages apply:
Mortgage Default Insurance Rates
In some provinces, mortgage default insurance will have an effect on total closing costs. In Quebec, Ontario, Manitoba, and Saskatchewan the borrower is required to pay the provincial sales tax (PST) portion on the mortgage default insurance, and in most cases, the PST is due as part of the closing costs, and is not added to the mortgage loan amount. If you are unsure if mortgage default insurance applies to you, or the cost implications it may have, contact me, Karen Canning, your Langley Mortgage Broker.
What to consider about Mortgage Default Insurance.
Because Mortgage Default Insurance is added to the total mortgage loan amount it has two effects on you, the borrower. The first has to do with the overall loan amount you are qualified for. If the property you are interested in is approaching your maximum qualified amount, the addition of mortgage default insurance could push you over that threshold. The second is in relation to mortgage payments. As the insurance value is added to the mortgage value and is paid through the mortgage payments, this has the end effect of increasing your mortgage payment. This is a consideration that should be factored in when looking at home affordability. As mortgage default insurance does not directly benefit you as the mortgagee, it is in your best interest to eliminate that cost by applying 20% down or greater if at all possible.
Mortgage Default Insurance Eligibility
Not all mortgages are eligible for mortgage default insurance, which in turn means there are limitations to you, the borrower, when it comes to these situations.
Mortgage default insurance is required when a down payment of 5%-19.99% is made (Less than 20%) on a mortgage loan from an institutional lender.
Mortgages exceeding $1 million in value are not eligible for mortgage default insurance and therefore must have a minimum of 20% down payment.
Mortgages exceeding 25 years amortization are not eligible for mortgage default insurance and therefore must have a minimum 20% down payment.
If you’re unsure about what to expect when it comes to mortgage default insurance, call Karen Canning, your Langley Mortgage Broker. I will take a look at your financial situation and provide you with sound advice to ensure you don’t take on more than you can handle in your home purchase.