Everything you should know about mortgage default insurance

If you’re in the process of buying a home, you may have come across the term “mortgage default insurance.” You might know that some people need it while others don’t, but where do you fall? Are you a buyer who will need to invest in this extra protection? Here’s what you need to know about this type of insurance, how it works, and who it benefits. 

What is mortgage default insurance?

Having a mortgage means having mortgage payment obligations. These are usually monthly payments made to the lender who financed your loan. However, what happens if the home owner is unable to make their mortgage payments? Is the lender simply out of luck? This is where mortgage default insurance kicks in. This coverage is designed to protect the lender in case you default on your mortgage. It provides them with reassurance that they will not lose their money, even if their client fails to make their payments.

Default insurance is an added premium some home owners must pay on top of their regular mortgage payments. This extra money cushions the potential difficulties a lender may otherwise encounter if their client defaults. Home owners with a down payment below 20 per cent must get mortgage default insurance. This is because smaller down payments mean bigger mortgages, and larger investments for the lender. Bigger mortgages mean more risk, because the lender has more at stake. 

Who provides it?

There are three providers of mortgage default insurance in Canada. The first is the Canada Mortgage and Housing Corporation (CMHC). They provide the majority of this insurance, and people often simply refer to it as CMHC insurance. However, there are two other providers, which are private insurers. These are Canada Guaranty and Sagen. These two providers tend to follow the CMHC’s lead in terms of rates, since the CMHC is backed by the government. These three insurers will all operate a bit differently, but your lender will opt for the provider that fits your situation best. 

Is it good or bad for the buyer?

Does needing mortgage default insurance spell bad news for buyers? It doesn’t have to! While it may feel like a punishment to pay for extra insurance because you have a smaller down payment, this insurance also helps more home buyers become owners. Without the existence of this insurance, mortgage lenders would be far less likely to finance mortgages with smaller down payments. Having this insurance gives lenders the confidence they need to take on a wider range of mortgages. At the same time, many home buyers struggle to come up with a 20 per cent down payment they can contribute upfront. The costs of living are incredibly high, and housing prices have made it very tricky for buyers to save that full 20 per cent. Mortgage default insurance allows more buyers to enter the market, removing a huge barrier for many people. It might also allow you to enter the market sooner, if you have enough saved up for a 10 per cent down payment, for example. 

It’s important to note that the actual costs of this insurance vary based on down payment size. The larger the down payment, the lower the insurance costs. This means if you can save a 15 per cent payment, you will owe less in insurance costs than someone with a five per cent down payment. 

Can you avoid it?

Many home buyers simply don’t want to deal with another cost during their purchasing journey, and that is completely fair. The only way to dodge this insurance is to contribute a full 20 per cent down payment. This is the amount lenders need to feel confident in your ability to pay your mortgage, without needing extra assurance. It’s also worth noting that if your home costs more than $1 million, you must contribute a 20 per cent down payment no matter what. If you don’t want to owe extra fees to your lender, you need to spend the time preparing your down payment. This might mean delaying your housing hunt while you save, but it will also cost you less down the road. 

Mortgage default insurance isn’t a topic that gets anyone excited, but it’s also not something to fear. This is a very common product that many home owners can benefit from! It’s just important to ensure you can afford these extra costs. That’s why you should reach out to a broker if you think you are likely to need this coverage. We can work with you to make sure it won’t stretch your budget to breaking point, and that it will serve your best interests.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.