An insured mortgage is a type of home loan in which the lender is protected against loss if the borrower defaults on the loan. to opt into an insured mortgage, generally your down payment would be under 20% and as low as 5% for first time home buyers. Usually mortgage insurance is provided by CMHC (In Canada).
Mortgage insurance protects the lender in the event that the borrower fails to make their monthly mortgage payments, and the lender is forced to foreclose on the property. Without mortgage insurance, the lender would be taking on a much greater risk, as they would be responsible for any losses incurred from the foreclosure process.
While an insured mortgage does provide some protection for the lender, it is important to note that borrowers will still be responsible for repaying any remaining balance of the loan, if the property is sold at a loss during foreclosure.
Mortgage protection insurance and other insurance
Mortgage protection insurance is a type of insurance that can help make sure your household finances are taken care of if something were to happen to you. This type of insurance is different from mortgage default insurance, which protects your lender if you can’t repay your mortgage.
Other types of insurance, such as life, health, or disability insurance, can also help protect your family’s home if something were to happen to you. You may have this type of insurance through work, or you may buy it from an insurance company.
Mortgage default insurance
Mortgage default insurance, often called CMHC insurance, protects your lender if you can’t repay your mortgage.
If you have a high-ratio mortgage, your lender must arrange for mortgage default insurance. A high-ratio mortgage is when your down payment is less than 20% of the value of your home.
Cost of mortgage default insurance
The cost of mortgage default insurance is based on a percentage of the loan amount, and is added to your mortgage.
For example, if you have a $250,000 mortgage and are required to purchase mortgage default insurance, the premium would be calculated as follows:
5% down payment of $250,000 = $12,500
your CMHC insurance or mortgage insurance premium would cost $9,500
You would add the $9,500 premium to your mortgage amount, for a total of $247,000.
Your monthly mortgage payments would be based on the total amount of your mortgage, including the default insurance premium.
How to pay for mortgage default insurance?
There are two ways to pay for mortgage default insurance:
You can add the premium to your mortgage amount and pay it off over the life of your mortgage. Or
You can pay the premium in one lump sum.
If you choose to add the premium to your mortgage, it will increase your monthly payments. If you choose to pay the premium up front, you’ll need to have the money available when you apply for your mortgage. In most cases, many choose to add this to the life of the mortgage loan.
Read More: On Insured Mortgages vs Non Insured Mortgages
Who offers mortgage loan insurance?
there is only three mortgage loan insurance companies that are available to use in Canada. private mortgage insurance Canada can only be purchased from the following:
Mortgage loan insurance in Canada is provided by the Canada Mortgage and Housing Corporation (CMHC), Sagen Financial Canada, and Canada Guaranty.
These organizations are all government-licensed mortgage default insurers. You can’t buy mortgage insurance from any other organization in Canada.
When is mortgage insurance required?
If you have a high-ratio mortgage, your lender will have you purchase mortgage loan insurance. A high-ratio mortgage is when your down payment is less than 20% and as low as 5% of the value of your home.
You may choose to purchase mortgage loan insurance even if you have a conventional mortgage with a down payment of more than 20%. This type of insurance is sometimes required by the lender if you are considered a high risk borrower, or you may choose to buy it to protect your investment.
How does mortgage insurance work?
Mortgage insurance protects your lender if you can’t repay your mortgage. If you default on your mortgage, the insurer will pay the lender an amount that’s equal to the remaining balance of your loan.
The insurer will then take over your mortgage and try to sell your home to recoup their losses. Keep in mind that you are still responsible for repaying the mortgage differences if there are any, even if the home is sold.
Read More about What is an insured mortgage
Advantages of mortgage insurance
There are a few advantages to having mortgage insurance:
- It allows you to buy a home with a smaller down payment.
- It can give you peace of mind, knowing that your lender is protected if you can’t make your payments.
- It can make it easier to qualify for a mortgage.
Disadvantages of mortgage insurance
- It adds to the cost of your mortgage.
- If you default on your mortgage, the insurer will take over your home and try to sell it. This could damage your credit score.
Tips for shopping for mortgage loan insurance
When you’re shopping for a bank mortgage or mortgage lender, you should try to compare the cost of mortgage loan insurance from different insurers. Here are a few things to keep in mind:
- The premium you pay is based on the size of your down payment and purchase price. The smaller your down payment, the higher the premium will be.
- The premium is also based on the type of home you’re buying. For example, a condominium will generally have a higher premium than a detached home.
- You may be able to negotiate with your lender in a rate occasion to have them pay the insurance premium. This is known as “lender-paid” insurance.
You may be able to reduce the premium or even opt out of having to get mortgage insurance by having a minimum of 20% down payment for your home.