So when you are getting a mortgage you start to learn about terms that you become somewhat familiar with but only because they seem to be forced upon you. This week I am going to take a look at mortgage default insurance and everything you should know.
Mortgage default insurance protects the mortgage lenders in case you default on your mortgage but the cost is yours I’m afraid. If a default were to happen, the mortgage insurer has guaranteed the lender will not take a loss on the loan. There are three mortgage insurers in Canada. We have the Canada Mortgage and Housing Corp. AKA CMHC, Genworth and Canada Guaranty. They all work in the same way really but have slightly different criteria as to which loans they will insure.
Most of the time we think of mortgage default insurance as for borrowers putting less than 20% of the purchase price down. The premium amounts are calculated as follows:
Standard Premium Rate Chart
LTV Ratio Premium Rate
– Up to 65% 0.60%
– 65.01% – 75% 0.75%
– 75.01% – 80% 1.25%
– 80.01% – 85% 1.80%
– 85.01% – 90% 2.40%
– 90.01% – 95% 3.60%
This is the base line for the premium rates. There will be an increase for self-employed people who cannot verify their employment income as per traditional guidelines. There will also be an increase premium if you are purchasing a second home as a vacation property or for a family member.
The math is calculated as follows:
– Purchase price less the down payment plus the mortgage insurance premium. The total amount becomes what you are borrowing from the lender though so that you do not have to come up with that premium out of pocket.
– If you end up selling and moving within the first two years you can port a percentage of the premium with you so that you do not have to incur the entire amount again.
– One thing many people are unaware of is that even if you put the full 20% down, the lender may apply for the mortgage default insurance anyway. This is to increase the security they and their investors have in regards to the mortgage. Most of the time the insurance premium in these cases are covered by the lender but in special circumstances, such as a rental property, you may still be required to pay it.
– The mortgage insurers are backed by the Government of Canada which means that our government is actually guaranteeing the loan. This exposure to the housing market is why they keep stepping in to change the mortgage rules and why it seems harder and harder to qualify these days.
One perk to the whole thing is this. If you are having trouble making your mortgage payments because of illness or job loss, you have a strong ally in your corner. It is far less costly for a mortgage insurer to attempt to work with you then it is for them to cover the costs of you defaulting. At the first sign of trouble call you lender and figure out which mortgage insurer you are with so you can get them on board. No one wants to see you lose your home.
So there you have it. Mortgage default insurance in a nutshell.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.