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. 

Down Payment

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. 

Benefits

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.

mortgage insurance

Premium Cost

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.

Coverage

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.

The Difference Between Mortgage Specialists

Mortgage broker

Navigating how to apply for a home or commercial mortgage can be confusing and overwhelming. It’s why you need useful information to pick a trustworthy person to lead you through the process of acquiring your financing.

When you buy a home, you have the choice of applying for a mortgage through a Canadian banking institution or mortgage broker. But what is the difference between the two?

Bank Mortgage Manager

The bank mortgage manager works for the bank. Given they are a bank employee, they will be representing the bank’s interests first when extending you a mortgage contract. They may require you to be a customer of their bank. The bank’s mortgage manager only accesses products and mortgage funds available from that bank for your mortgage application. They can offer a range of interest rates and terms under the parameters dictated by the bank. 

Having a mortgage with a regular banking institution may make it easier to refinance to one of their products or change terms of the loan in the future. The bank’s rates and penalties for a bank mortgage may be higher than other lenders. Bank mortgage managers may deny residential and commercial mortgages if the applicant doesn’t meet criteria under their lending terms. For example, bad credit scores or unusual payment arrangements.

Various banks have different terms and interest rates. So, it is up to the customers applying for mortgages to get information to make an informed decision. 

Your bank mortgage manager will rarely refer you to another lender unless you don’t meet any of their conditions.

The majority of Canadians are still using banks as their primary mortgage lenders. The reason may be that they have already established a working relationship with their bank. Sometimes the process can be smoother, as the bank has access to all the financial data for the applicant.

Some people who have built a relationship with their bank may opt to go that route. They feel confident because the main banks have a long-standing history of lending, backed by government assurances.

Mortgage broker

A mortgage broker is a licensed professional who works with many banks and other lenders to obtain the best mortgage for you. They can get you into a mortgage agreement with a bank, but also have other lending options available. Because of the options to choose from, they may get you approved even if other lenders deny you. 

Mortgage brokers usually take a 1 or 2% commission on the mortgage from the lender on finalized contracts. This payment generally comes from the lender and is not an out of pocket fee for an applicant. If fees in the contract are too pricey, terms can often be negotiated to lower them. 

The mortgage broker’s search scope includes a wide range of financial institutions and lenders, like credit unions and independent lenders. They collect information from you and try to find the lender that best fits your mortgage needs and terms.

Looking outside the traditional lenders can be very helpful to people with poor credit, or other reasons banks declined their application. Mortgage brokers do the legwork of sifting through various lenders’ terms and interest rates and present options to you. 

They may include established banks in the line-up of lender choices. A mortgage broker will go over all the information so that you can make an informed choice. Often a broker will work flexible hours and adjust schedules after banking hours to meet client needs. 

They will negotiate the terms of your final choice with the lender, possibly saving you money. A mortgage broker’s expertise in the field helps them help you with terminology and negotiating tactics. 

Be aware that the final mortgage contract is just between you and the lender.

Helpful resources

As with all legal documents, clients should read the final negotiated contracts carefully before they sign.

Anyone dealing with mortgages, whether it is your bank or mortgage broker, has to be licensed with the Real Estate Council of Alberta. It is important to check into this before you retain their services. Some fraudulent mortgages have left people with a severe financial loss. Financial lenders are also regulated and monitored by the federal government. 

The Alberta government licenses financial lenders and a list of licensed lenders can be obtained at your local registry office, or checked on the Alberta government website.

 

If you would like a free consultation with a Calgary mortgage broker, our licensed and professional staff at The Mortgage Group will be happy to answer any questions.