Buying a home is filled with new and sometimes bewildering terminology and concepts. Mortgage insurance is one of those pieces of the mortgage process which first-time homebuyers often don't fully understand. This article sheds some light on the concept of mortgage insurance - or more specifically, mortgage loan insurance which you may also know as CMHC insurance.
Defining Mortgage Insurance
Mortgage loan insurance, mortgage default insurance or simply mortgage insurance all refer to the same thing. It's an insurance policy that compensates lenders from losses incurred if the borrower defaults on the payments. Mortgage loan insurance is often confused with mortgage protection insurance or mortgage life insurance. This type of insurance pays off the mortgage balance to the beneficiary if one or more of the homeowners passes away. Mortgage life insurance is optional, though some lenders do their best to make it sound otherwise.
Does Everyone Need Mortgage Insurance?
Like any type of insurance, whether for your health, car, home, or mortgage, there are benefits to having it. Insurance is protection against costs or consequences that could be difficult for you to manage if you didn't have the insurance. However, mortgage insurance is only mandatory if your mortgage is a high-ratio mortgage. You may recall that a high-ratio mortgage is one in which the loan value is more than 80% of the home price. There are situations when your lender may want you to have mortgage insurance, even if your loan-to-value ratio is lower; however, it is not a requirement.
Who Benefits from Mortgage Insurance?
Mortgage loan insurance generally protects the lender. When required, the lender will usually make the arrangements to purchase the insurance from one of the three mortgage loan insurance providers in Canada; CMHC, Genworth Financial, and Canada Guaranty. The cost of the premium is passed on to the homeowner.
How Long Do I Have to Pay?
Mandatory mortgage loan insurance involves a one-time premium calculated based on the price of your home. CMHC has a handy online mortgage insurance calculator to help you estimate your premium, but you can generally expect it to cost between 2% and 4% of the mortgage amount. You have the option to pay the premium outright, or you can choose to add it to your mortgage loan. While convenient, adding to your mortgage means you'll be paying interest on the insurance amount for the life of your mortgage.
Avoiding Mortgage Insurance
Since mortgage insurance is mandatory for high-ratio mortgages, the only way to avoid it is to put down a larger down payment. That's not always an option, especially when housing prices continue to climb. Due to mortgage down payment rules in Canada, homes priced at more than $1 million are not eligible for mortgage insurance because high-ratio mortgages are not allowed on homes above this price.
The Silver Lining of Mortgage Loan Insurance
Despite the cost, mortgage insurance has benefits for the homebuyer as well. First, it allows homebuyers to get into the market sooner by getting a mortgage with as little as a 5% downpayment for homes priced up to $500,000. Secondly, the reduced risk of an insured mortgage allows lenders to offer lower interest rates than uninsured mortgages. In fact, the savings in interest over the mortgage amortization covers some of the insurance costs.
Now You Know the Basics
We've covered the basics of mortgage insurance in this blog, but there are other options to consider for your financial situation. For example, mortgage life insurance or a standard life insurance policy can also protect you and your home if you are no longer able to make the mortgage payments.
Before applying for mortgages, call a mortgage broker to talk about your financial situation and your expectations for homeownership. A mortgage broker is adept at finding the best interest rates from among the many lending partners they work with. And they can help you determine your needs and your options for mortgage insurance.