Obtaining mortgage loan insurance is mandatory for homebuyers in Canada who put between 5% and 19.99% for their down payment towards a new home or condo. While it\u2019s ideal to put at least 20% down in order to avoid these costs, home prices in cities throughout Canada are rising faster than many homebuyers can save making it difficult to reach that 20% goal. Access to mortgage loan insurance allows homebuyers to put less than 20% down, bringing the dream of homeownership within reach. The premiums can either be paid up front in a lump sum or incorporated into an applicant\u2019s mortgage loan payments.<\/p>\n
To help prospective homebuyers learn more about mortgage loan insurance and how it works, we\u2019ve compiled a list of the top seven need-to-know questions with the help of Monica Guido, Client Relations Manager at the Canada Mortgage and Housing Corporation (CMHC).<\/p>\n
1. What is mortgage loan insurance and how does it differ from other types of insurance?<\/p>\n
The Department of Finance determines the rules governing mortgage insurance and requires it when homebuyers have a down payment of less than 20% of the purchase price of a home or condo. Mortgage loan insurance is very different from mortgage life insurance or mortgage protection insurance. It protects the lender in the event that a borrower cannot make payments and defaults on their loan whereas mortgage life insurance protects the borrower in the event that they become seriously ill or die unexpectedly.<\/p>\n
\u201cA common misconception is that mortgage insurance protects the consumer,\u201d says Guido. \u201cBecause the consumer is paying for something they automatically feel that they are the recipients of the protection but it actually protects the lender and the cost is transferred to the borrower.\u201d<\/p>\n
2. Who provides mortgage loan insurance in Canada?<\/p>\n
The Canada Mortgage and Housing Corporation (CMHC), Genworth, and Canada Guaranty are the three providers of mortgage loan insurance in Canada. The main difference is that CMHC is a Crown corporation of the Government of Canada while the latter two are private companies. The cost of insurance and lending guidelines are generally the same across the board, however providers may offer certain rebates such as discounts for energy efficiency, so it\u2019s important to look at the products available from all three.<\/p>\n
3. What is the maximum purchase price that is eligible for mortgage loan insurance?<\/p>\n
The maximum purchase price or property value must be below $1,000,000. Homebuyers should note that the minimum down payment also differs depending on the price of the home.<\/p>\n
\u201cIf the home costs $500,000 or less you would need a minimum down payment of 5%,\u201d says Guido. \u201cIf the home costs more than $500,000 you would need a minimum of 5% down on the first $500,000 and 10% on the remainder.\u201d<\/p>\n
4. What are the benefits of mortgage loan insurance?<\/p>\n
With average home prices, taxes and the cost of living rapidly increasing in many urban areas across Canada, saving 20% for a down payment could take years or even decades depending on where you live. In many cases, the longer you wait to save, the higher the price of the home and the required down payment that goes with it. Mortgage loan insurance allows homebuyers to purchase a home or condo with as little as 5% down while giving them access to lower interest rates.<\/p>\n
\u201cMortgage insurance protects lenders against borrower default thereby reducing risk,\u201d says Guido. \u201cAs a result, it encourages lenders to provide financing options to homebuyers at interest rates comparable to buyers with a larger down payment.\u201d<\/p>\n
5. How is the premium calculated?<\/p>\n
The premium for mortgage loan insurance depends on the amount of your down payment. The closer you are to 20%, the lower your premium will be. The current rate ranges from 2.80% for down payments of 15 to 19.99%, up to 4.0% or 4.5% for down payments of 5.0% to 9.99%.<\/p>\n
\u201cMortgage insurance premiums are determined by the homebuyers\u2019 down payment as a percentage of the purchase price,\u201d explains Guido. \u201cThose with a down payment of less than 10% of the purchase price, the cost is 4% of the loan amount. The premium rises to 4.5% of the loan amount for homebuyers with borrowed down payments.\u201d<\/p>\n
6. Can a homebuyer be the declined for mortgage loan insurance?<\/p>\n
Like any insurance product, applications for mortgage loan insurance can be declined. Insurance providers will look at several factors to assess the borrower\u2019s ability to repay their loan, including the loan amount, the property being purchased, their income, credit history and credit score.<\/p>\n
\u201cIf we don\u2019t feel confident that the borrower fits within our risk guidelines, we will not proceed with the application,\u201d says Guido. \u201cThese risk guidelines are what we call Gross Debt Service (GDS) and Total Debt Service (TDS). These ratios look at the percentage of their monthly household income that covers their housing cost and the percentage of their monthly income that cover housing costs plus any other debts.\u201d<\/p>\n
7. What happens if a buyer defaults on their mortgage?<\/p>\n
All three insurance providers offer assistance programs for those at risk of defaulting on their mortgage payments as a result of financial difficulties or an unforeseen life event. Genworth\u2019s Homeowner Assistance Program works with clients to establish alternative arrangements such as partial, shared or deferred payment plans. Canada Guaranty has a Homeownership Solutions Program that offers options like loan or agreement modifications that include reducing the contract rate to reflect the current interest, should they be lower. CMHC also offers solutions for homeowners experiencing temporary financial difficulties including altering payments or amending the amortization period.<\/p>\n
\u201cOur Default Management Program will work closely with the lender to work with the client and find a way to help them get out of their financial distress,\u201d says Guido. \u201cEvery scenario is different based on the client\u2019s needs but it gives us that opportunity to work with the lender in order to establish a good relationship with the client and ensure that they are supported.<\/p>\n