What Is Mortgage Insurance & Do You Need It?
When buying a home, there are many things you need to do and lots to learn about the mortgage process. From the application process to interest rates, it can feel overwhelming. Now, you’ve come across the term mortgage insurance. What is it? Do you need it? Who can help you through it? These are some questions we’ll answer in this article.
WHAT IS MORTGAGE INSURANCE?
You may have come across a few variations of mortgage insurance. First, let’s talk about mortgage default insurance. Sometimes it’s also referred to as mortgage loan insurance.
So how does it work? If you put down less than 20% on your down payment, you are required to have mortgage insurance. A lower down payment means a higher ratio mortgage. As a borrower, this puts you at a higher risk than someone who puts down a higher down payment. Your lender wants protection if you cannot make your payments.
Homes in Canada purchased under $500,000 require a minimum 5% down payment. For homes between $500,000 and $1,000,000, you need to put a down payment of 5% on the first $500,000. and 10% on the balance. Lastly, homes over $1,000,000 require at least a 20% down payment on the purchase price. Thus, a million-dollar home does not qualify for mortgage insurance.
With that said, there are many benefits for new homeowners. For example, mortgage insurance allows Canadians to buy a home without a large down payment. This helps lower the barrier for those who want to become a homeowner but might not have enough funds put away in savings. If you can produce a 5% down payment, you can begin your homeowner journey. The 5% can come from your savings, a gift from family, RRSP’s or investments.
Mortgage insurance protects the lender. Therefore, it helps more people qualify as a borrower. In addition, it ensures mortgage funding availability during slumps in the economy.
WHERE CAN I GET MORTGAGE INSURANCE?
In Canada, there are three mortgage insurance companies that work with lenders. This includes the Canada Mortgage and Housing Corporation (CMHC), Sagen Financial, and Canada Guaranty.
The insurance premium is calculated based on the loan to value ratio. You are responsible for this cost. You can either pay the premium in a lump sum or have it added to your total loan amount.
For example, your loan-to-value could be up to 95%. That means you should expect roughly a 4% premium on your total loan. Keep in mind that Manitoba, Quebec, and Saskatchewan have provincial sales tax as well. In this case, you must pay the PST upfront.
CAN I AVOID MORTGAGE INSURANCE?
If you want to avoid paying the cost of the premium, there are a few ways to do so. As mentioned earlier, a down payment of over 20% means you do not need mortgage insurance.
You can increase your down payment amount in a few ways. The first is through monetary gifts. A gift from a family member could help you put down more in your down payment. If you are a first-time homebuyer, you may take money out of your RRSP. The Home Buyers’ Plan allows you to withdraw up to $35,000 tax-free.
Lastly, you may consider purchasing a less expensive home to pay a larger down payment.
MORTGAGE LIFE INSURANCE
Do not confuse mortgage default insurance with mortgage life insurance. When you take out or renew your mortgage, they might offer you this optional coverage. Similar to default insurance, you will pay a premium that’s added to your mortgage payment. You can purchase life insurance through your lender or another insurance company. This gives you the freedom to look at what’s the best option for you.
Life has many unexpected moments. Understanding your coverage can greatly help your loved ones. If you lose your job, become critically ill, become injured or disabled, or pass away, the insurance can help pay off your mortgage. If you have dependents or a spouse, this could take off financial strain if something happens to you.
However, other forms of insurance may already help cover this. Carefully go through your policies because you may already have them under your employer.
CONSULTING A BROKER
With so many options available, how do you know what’s best for you? Working with a mortgage broker can help. It can be easy to miss the fine print on insurance documents or be unsure of what coverage you qualify for. By factoring in your personal goals and needs, they will help you better understand your mortgage insurance.
For more professional advice on mortgage insurance, contact our team at The Mortgage Group Inc. We will assist you every step of the way with any and all of your mortgage needs.