What You Must Know Before Getting a Mortgage Insurance

When you’re preparing to buy a home, mortgage insurance might seem like just another step in the process. However, it’s essential to understand how mortgage insurance works and whether it’s the right option for you. Mortgage insurance is designed to protect lenders if a borrower defaults on their loan, and it’s required for high-ratio mortgages—those where the borrower puts down less than 20%. Before jumping into a mortgage insurance policy, here are key factors you need to consider:

1. Who Does Mortgage (Default) Insurance Protect?

Contrary to popular belief, mortgage insurance primarily protects the lender, not the borrower. If you default on your mortgage payments, the insurer compensates the lender for the remaining balance on the mortgage after your house may have been sold through power of sale or foreclosure. See a typical default management process here.

2. When Is Mortgage Insurance Required?

In Canada, if your down payment is less than 20% of the home’s purchase price, you are required to obtain mortgage insurance. This type of insurance is mandated by federally regulated mortgage lenders to reduce the risk for the lender, especially for higher-risk loans where the buyer may be unable to make a larger initial payment.

3. Who Are the Mortgage Insurance Providers?

There are three main mortgage insurance providers in Canada:

• Canada Mortgage and Housing Corporation (CMHC)

• Sagen (formerly Genworth Canada)

• Canada Guaranty

Each of these institutions provides mortgage insurance but follows slightly different rules and pricing structures. It's essential to compare their offerings before committing to one.

4. Cost of Mortgage Insurance

The cost of mortgage insurance is not a fixed number; it varies based on the size of your down payment and the total amount of your mortgage. Mortgage insurance premiums are generally calculated as a percentage of your loan amount and it can range from 0.6% to 6.3%. This premium can be paid upfront or rolled into your mortgage payments, increasing your monthly costs.

5. Impact on Your Mortgage Payments

While mortgage insurance allows you to buy a home with a smaller down payment, it does increase your overall loan balance, which means you’ll be paying interest on the insurance premium for the life of the mortgage. This could result in higher monthly payments and more interest paid over time, so you should factor these costs into your overall financial plan.

6. Difference Between Mortgage Insurance and Life Insurance

Many homeowners confuse mortgage insurance with life insurance that covers the mortgage in case of the borrower's death. In case of a default, mortgage insurance will only pay if there is a shortfall after your house has been sold, while life insurance helps your family to keep your house by paying off the entire mortgage in case of unfortunate events like death.

7. Flexibility and Portability

Some mortgage insurance policies are tied to the specific loan and property, which means if you move or refinance, you may have to take out a new policy. However, certain insurers offer portability options, allowing you to transfer your existing policy to a new mortgage or home. Be sure to check if the policy you are considering offers this flexibility, especially if you plan to move in the near future.

8. Should You Get Mortgage Insurance?

While mortgage insurance is mandatory for certain borrowers, it’s important to evaluate if you should take steps to avoid it. For example, increasing your down payment to 20% or more can help you avoid the cost of mortgage insurance altogether, saving you money in the long run. However, for first-time buyers who might not have enough saved, mortgage insurance can be a helpful tool for entering the housing market sooner.

Conclusion

Before committing to mortgage insurance, it’s essential to understand how it works, who it protects, and how it affects your overall home-buying costs. Weigh the pros and cons of paying the premium versus increasing your down payment to avoid it. If mortgage insurance is your only option, compare providers to ensure you’re getting the best deal and understand the terms of your policy thoroughly and pay the premium upfront if you can.

For more details, consider speaking with a financial advisor to ensure you get a comprehensive insurance coverage that protects you and your loved ones, not just the lender.

Contact us to help you understand the specifics of your coverage, save a lot of money and navigate the complex world of mortgage insurance with confidence.

Additional reading: https://www.canadalife.com/investing-saving/mortgages/buying-your-first-home/closing-costs/mortgage-default-insurance.html, https://www.spergel.ca/learning-centre/mortgage-debt/what-happens-when-you-default-on-a-mortgage-in-canada/#:~:text=Power%20of%20sale%20or%20foreclosure,to%20recoup%20the%20outstanding%20debt.