One cost that can be overlooked by home buyers is mortgage default insurance.
So, what exactly is mortgage default insurance and why do you need it?
If you’re buying an owner-occupied home with less than 20% down payment, you are required to purchase mortgage default insurance in order to arrange your financing. When buying a rental property, some lenders require you to purchase this insurance if you put down less than 35% towards your purchase.
As real estate values in Metro Vancouver continue to soar, many home buyers, especially first time home buyers, often have less than 20% of the purchase price available as a down payment. The average price of a new home is now well above $500,000 meaning a 20% down payment can easily exceed $100,000. This is a lot of money for most people and it’s understandable why many fall short of this 20% down payment.
Conventional vs. High-Ratio Mortgage
Borrowers who have a payment of 20% qualify for conventional mortgage financing. For your lender this means the property has sufficient equity to protect the lender from any shortfall should you, the borrower, default on your mortgage. Having a higher down payment also means you have more “skin in the game”, making it less likely you’d default and walk away.
A high-ratio mortgage means the borrower has anywhere from 5% – 19.99% towards their down payment. Financing can still be obtained but in this case you will be required to purchase mortgage default insurance. The higher loan-to-value (LTV) percentage of a high-ratio mortgage means you have less equity at stake and thus a higher potential of default.
The lender wants to protect their investment and they do this through mortgage default insurance. This is an additional cost to the borrower but it also makes it possible for those with limited savings, particularly first time homebuyers, to get into the market sooner.
Mortgage Default Insurance Providers
There are three major insurers in Canada. The Canadian Mortgage & Housing Corporation (CMHC) is a Crown Corporation and the largest provider of mortgage default insurance in Canada. Genworth Canada and Canada Guaranty also provide this type of insurance to the lenders.
Your lender or financial institution will arrange and pay for your insurance, but this cost is typically passed on to the borrower and is incorporated directly into your mortgage payments. Insurance premiums are tiered and based on the amount borrowed and the size of your down payment.
Feel free to contact me with any questions.