What is Mortgage Loan Insurance?
Mortgage Default Insurance, commonly referred to as Mortgage Insurance, allows homebuyers to achieve the dream of homeownership with a low down payment.
In Canada, mortgage insurance is required federally on all high-ratio mortgages - that is, mortgages with a down payment of 20% of less. This insurance, which protects the lender in case of borrower default, gives lenders the flexibility to offer borrowers with low down payments the same low interest rates they would offer homebuyers with more equity.
Mortgage insurance premiums are based on the amount of the mortgage. Although they can be paid in a lump sum upon closing, they are normally added to the mortgage amount and paid over the length of the mortgage.
This insurance is not to be confused with mortgage life insurance, which protects homeowners and their families in the event of death or illness.
There are 2 basic types of mortgages. These types depend on the amount of equity or down payment that is present at the time of financing approval.
Conventional Mortgage. The loan amount does not exceed 80% of the property value, defined as the lesser of the purchase price or the appraised value. If you are buying a home as a rental property/investment you will be required to have a minimum down payment of 20% resulting in conventional mortgage. Clients purchasing an owner occupied home are exempt from default insurance fees. Those who are purchasing investment properties may be subject to a default insurance fee.
Example: With a property value of the home at $400,000 and 80% being the upper limit for the conventional mortgage the loan would be a maximum of $320,000. If the loan amount was any higher it would be high ratio.
High-Ratio Mortgage. The principle amount is more than 80% of the property value up to 95%. By law, a high ratio mortgage must e insured against borrower default (the borrower not being able to make mortgage payments). The borrower pays a mortgage insurance premium which can be added to the mortgage loan or paid in a lump sum in advance. This premium is based on a percentage of the principle amount and on the size of the loan.
Example: Property value of the home is $400,000. Mortgage loan amount is $350,000.
350,000/400,000 = 87.5%
Since the mortgage loan amount is more than 80% the loan is high ratio and needs to be insured. At todays rates, mortgage insurance would cost $8,400 which is 2.4% of the borrowed amount. Please see the the link below for more information and all applicable rates.