Mortgage Insurance

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Canadian Mortgage Insurance

In Canada, homeowners who put down less than 20% have to purchase mortgage insurance. What is mortgage insurance and why do you have to purchase it?

What is Mortgage Loan Insurance?

In essence, mortgage loan insurance protects lenders from borrower default.

According to federal banking law, mortgage shoppers with less than a 20% down payment are required to purchase mortgage loan insurance.

Borrowers who purchase a home and have a least a 20% down payment are considered low-risk borrowers. Think about it from a lender´s perspective, if a borrower has been disciplined enough to save at least a 20% of their home´s purchase price, they must be financially savvy.

Hence, no mortgage loan insurance required.

Borrowers who put down less than 20% are considered riskier borrowers. Even with stellar credit, if you apply for a mortgage and don´t have at least a 20% down payment, you will have to purchase mortgage insurance.

Be sure to check with your lender for their mortgage insurance requirements, as mortgage insurance premiums vary greatly (e.g., from .05 to 2.75%).

Mortgage Insurance Canada: The CMHC

According to the July 2005 issue of Canadian Business magazine, mortgage insurance is an extremely profitable sector. It states, ". . . over the past 10 years CMHC has paid out at an average rate of 45%, far lower than most other forms of insurance. In fact, there is probably no more lucrative line of insurance in Canada than mortgage insurance."

It may have something to do with the fact that two-thirds of mortgage insurance in Canada is largely controlled by the CMHC, a government agency. CHMC stands for Canada Mortgage and Housing Corporation. It inoculates lenders against borrower default by guaranteeing home loans.

Where would the real estate industry be without mortgage insurance? Canada mortgage shoppers who couldn´t afford large down payments wouldn´t be able to qualify for mortgages. Think what this would do to the economy.

While some consider it an out-of-control government behemoth, the CMHC - via mortgage insurance - makes mortgages possible for millions.

Home Mortgage Insurance: Mortgage Protection Insurance

Ever wonder what would happen if you were unable to work for whatever reason? Would you be able to keep up with your mortgage payments?

For many, this is a valid concern. Homeowners have the option of a type of home mortgage insurance to protect against this: mortgage protection insurance.

Is this a type of home mortgage insurance you should purchase? Following are some of the basics of this type of home mortgage insurance. Check with your financial advisor to see if it´s right for you.

Payout: Many of these policies payout out from the 31st day that you´ve been out of work (some require you to be out of work for at least 90 days before they will begin to pay out).
Length of Coverage: Most pay out for at least 12 months; some provide 24-month coverage.
Tax-Free. The income paid to you over this time is tax free. Although, check with your tax preparer for specifics as they relate to your financial situation.
Exclusions: All home mortgage insurance policies have exclusions (e.g., pre-exisitng medical conditions). And, they vary from carrier to carrier. Some exclusionary information you want to check are details that pertain to, for example, self-employed workers, age of retirement, length of time employed, etc.
Cost: Costs on this type of home mortgage insurance varies widely, but it is not cheap. Shop around for competitive rates.

Mortgage Insurance Rates

Mortgage insurance rates used to be flat-fee charges. In recent years, this has changed.

Many mortgage insurers now used an innovative policy known as risk-based pricing. What are risk-based mortgage insurance rates policies?

These policies based your mortgage insurance premiums on your credit score. The better your credit score, the lower your premium. This is particularly advantageous to buyers with stellar credit who don´t have the typical 20-25% to put down.

As mortgage insurance rates vary greatly (they can vary by as much as a whole percentage point or more, depending on your credit score), sure to ask your lender about risk-based mortgage insurance premiums.

The flip side: Borrowers with less than stellar credit may see an increase in insurance rates to offset the savings to buyers with excellent credit.

High Ratio Mortgage Insurance

As of April 2007, all mortgages with less than a 20% down payment were considered high-ratio mortgages. Consequently, they required high-ratio mortgage insurance. The 40 or so years before April 2007, the down payment requirement was 25%.

High-ratio mortgage insurance protects lenders from borrowers who may default on their mortgages. And, until recently, there were only a couple of places to buy high-ratio mortgage insurance: the CMHC and a private company, Genworth Financial.

Now, however, competition is coming to the market. Many American firms are entering the Canadian mortgage market. This means better rates on high-ratio mortgage insurance for borrowers. And better terms. For example, until recently, it was practically unheard of for Canadian mortgage shoppers to get mortgage insurance with 0% down. Today, it´s possible.

What does this means for the high-ratio mortgage insurance market in Canada? Will this change the way Canadians shop for and pay for homes.

A more financially stable consumer than Americans when it comes to paying off their mortgages, some industry experts see a change - and not for the better - on the horizon.

Only time will tell.

Mortgage Insurance Calculator

With varying rates on mortgage insurance premiums, using a mortgage insurance calculator can help you figure out what you should be paying in insurance premiums.

Mortgage insurance calculators are some of the simplest financial calculators to use. By simply typing in your down payment amount and your loan amount, a mortgage insurance calculator can tell you what your PMI (private mortgage insurance) is going to be.

As alluded to above, private mortgage insurance rates vary from region to region. They also depend other factors, e.g., your credit score, the type of loan you are applying for, the type of property you´re buying, etc.

Mortgage interest rates are subject to change without notice. We attempt to maintain accuracy on our website, however, mortgage information on this website should be used only as a guideline. Please consult a mortgage professional before taking any action.