What is mortgage insurance? Will I need it to buy my first home and how much will it cost?
Q: What is mortgage insurance, and when is it required?
A: Mortgage insurance (also called mortgage default insurance) is required by the government when Canadians buy a home with a down payment of less than 20 per cent. In short, if your down payment is less than 20 per cent of the price of your home, you’ll need to buy mortgage insurance.
This insurance doesn’t protect you — it protects the mortgage lender (usually a bank). If you default on your mortgage — meaning you fail to meet your mortgage payment obligations — the mortgage insurer will cover the bank’s shortfall should there be one after foreclosure, explains Toronto mortgage broker Ron Butler. In foreclosure, the lender seizes and sells the property to recover their money.
Mortgage loan insurance premiums range from 0.6 per cent to 4.5 per cent of the amount of your mortgage, according to the government of Canada’s website. The bigger your down payment, the lower your premium.
For a home that costs $500,000 or less, a minimum down payment of five per cent is required. If the home costs more than $500,000, the minimum is five per cent down on the first $500,000 and then 10 per cent on the remaining amount. So, while you may have the required down payment, if it’s not 20 per cent of the purchase price, you’ll need the insurance. You won’t qualify for mortgage insurance if the home costs $1,500,000 or more.
With mortgage default insurance, your mortgage lender pays the premium to the insurer (which is based on the size of your down payment and is calculated as a percentage of the mortgage) and then passes the cost on to you. You can pay for it in a lump sum or you can add it to the total balance of your mortgage and include it in your monthly payments (most people choose the latter as it can be in the tens of thousands).
The Canadian Mortgage and Housing Corporation, Sagen and Canada Guaranty all provide mortgage default insurance for the same premiums and borrower criteria. Your mortgage lender typically determines which insurer you go with at the underwriting stage. You can find mortgage insurance calculators online to help you determine how much you might pay based on the purchase price and your down payment amount.
A few things to keep in mind: mortgage default insurance is meant to protect the lender; it will not cover your mortgage payment if you can’t pay it. To qualify, at least one of the borrower applicants typically needs to have a minimum credit score of 680 (there are exceptions for newcomers and others who haven’t built a credit history). Also, the home must be your principal residence.