A Beginners Guide to Mortgage Insurance and how does it affect you?
Mortgage default insurance, also known as CMHC insurance, is mandatory for Canadian homeowners who have a downpayment of more than the absolute minimum of 5% and less than 19.99%. Put simply; mortgage insurance is a way to protect the mortgage lenders, in the event a borrower defaults on their mortgage loan.
1. Why Mortgage Insurance Isn’t Necessarily a Bad Thing
Although mortgage default insurance is quite expensive – it costs homebuyers .60% – 6.60% of their total mortgage amount. It does allow Canadians, who might not otherwise be able to get into the Canadian real estate market get started. Because, without mortgage insurance, mortgage rates would be significantly higher due to an increase in the risk of defaulting mortgages. Also with mortgage insurance, lenders can offer lower mortgage rates.
2. Mortgage Insurance Isn’t for Everyone
Contrary to what many assume, not everyone is required nor does everyone qualify for mortgage insurance. To be eligible for mortgage insurance, you have to be able to check off a couple of boxes.
- The mortgage cannot be longer than 25 years for Insured mortgages;
- A more substantial down payment is required if the purchase price is between $500,000 and $999,999. This increase equates to 5% of the first $500,000 and then 10% of the balance;
- Home buyers cannot purchase Mortgage insurance for homes valued at more than $1 million. A full 20% downpayment is required when buying a home of $1 million or more.
3. How is Mortgage Insurance Traditionally Paid?
Home buyers can obtain Mortgage default insurance through the Financial Institution. However, unlike other payments such as legal fees and land transfer tax, mortgage insurance does not require a lump sum payment. Instead, your mortgage default insurance premium is added to your regular mortgage payments and then paid back over the life of your loan. If you do not wish to have the mortgage default insurance added in your mortgage amount, you must specify this upon applying for the mortgage; then you would be required to pay the mortgage default insurance by cheque to your solicitor.
4. Is it Possible to Lower My Mortgage Insurance?
There are two options to lower your mortgage insurance, and that is to increase your down payment concerning the overall purchase price or purchase a less expensive home.
5. How to Increase Your Downpayment:
If you choose to save more money for your downpayment, knowing that it might take a little longer, and it can ultimately mean that you make more compromises on the home you do eventually purchase. Here are a few ways that you can save to put even more money towards your down payment:
- If you are a first-time homebuyer, you can take money out of your RRSP (tax-free) to go towards your down payment. RRSP’s must have been in your RRSP for a minimum of 90 days;
- Get a gift from parents;
- Pay off your debt aggressively;
- Sell clothes and things that you no longer want or need;
- Pick up a second job or a side hustle;
- Offer to baby or pet sit;
- Be patient as you work towards your savings goal
6. Are there other Mortgage Insurance Companies?
Over the years, as CMHC increased their mortgage insurance premium, therefore other mortgage insurance companies opened up shop to compete against CMHC, offering the potential new home buyer more options to qualify for a mortgage. Such companies are Genworth Canada and Canada Guaranty. Their mortgage insurance premiums work along the same principle as CMHC, and premiums vary between companies from .60% to 6.60%. Other factors contributing to the insurance rate is whether you are self-employed, buying your first home, buying a secondary residence, or investment property.
Mortgage insurance is in place for a reason, and while it can be frustrating at times, it does do more good than bad. After all, without it, the Canadian real estate market would be even more challenging to buy into than it currently is. If you have additional questions about mortgage insurance, you can either speak with us here. Check out other links such as Mortgage default insurance, Investing in the Canadian real estate market, or the CMHC website.
You can also contact us directly at 1-800-472-9791 for mortgage advice.
Social Media Team.