4 common questions about mortgage default insurance

Buying a home comes with lots of costs. This is no surprise to anyone. However, it can be hard to keep track of just how many things you need to pay for throughout this process. One item that is often overlooked, but is very important, is mortgage default insurance. Depending on your situation as a buyer, you may or may not need to purchase this product. How do you know if this cost will apply to you? What is it, and how does it work? Here’s what you need to know!

#1 Who needs mortgage default insurance?

The first question most people have when they hear about mortgage default insurance is what exactly it is, and who needs it. If you are new to the housing market, you may not be familiar with this insurance, or how it affects you. Mortgage default insurance is a product designed to protect mortgage lenders in the event that a borrower cannot pay their mortgage. If a borrower defaults, their lender will be covered by this insurance. This ensures the lender does not suffer a huge financial loss after providing financing to a borrower who defaults on their mortgage down the road. 

Not everybody needs mortgage default insurance. This is a product designed for high-risk mortgages. A “high-risk” mortgage is one where the borrower’s down payment is less than 20 per cent. Lower down payments mean a higher amount of financing is required. In theory, this puts lenders at higher risk. Of course, this doesn’t mean all borrowers with a lower down payment are high-risk home owners who will not pay their mortgage! This just adds an extra layer of protection for the lender, making them more willing to finance a larger mortgage.

#2 Where do you get it?

Mortgage default insurance is not directly provided by your lender. Instead, there are a few specific providers Canadian home buyers can use. These are the Canadian Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. The CMHC is supported by the government, and it typically influences the other two major providers. For this reason, it is the most well-known and frequently used. Sagen and Canada Guaranty, meanwhile, are private insurers. These three providers typically don’t have too many differences from one another from the borrower’s perspective. Your lender will often select the insurer, so you likely will not have a choice. Generally, the rates across all three providers are similar as well.

#3 How much does it cost?

Speaking of rates, how much does mortgage default insurance cost? Insurance is calculated based on the size of your down payment. It ranges between 2.8 and four per cent of your mortgage amount. However, if you are a first-time buyer or you are buying a new-construction home and have a 30-year amortization, the costs can be even higher. The more money you borrow, the higher your premium will be. If you have a five per cent down payment, you will be looking at a four per cent insurance premium. On the other hand, a 10 or 15 per cent down payment will allow you to access a lower premium. These costs are often rolled into your mortgage payments, so you pay for it over time. 

#4 Is it worth it to enter the market sooner?

If a smaller down payment means you need to purchase mortgage default insurance, why not just wait until you can save up a larger down payment? The big reason is that this insurance allows you to enter the market sooner. Down payments can take years to save up, and securing a 20 per cent deposit is not always realistic for buyers. Default insurance is a good option for these people, allowing them to become home owners and start building equity sooner. Plus, housing market trends come in waves, with conditions sometimes favouring buyers and sometimes sellers. Many buyers want to time their market entry correctly, and they don’t want to miss their chance when the opportunity comes along.

Mortgage default insurance will not be part of everyone’s mortgage experience. However, it’s important to understand what it is, how it works, and who it benefits in the housing market. This product allows many home buyers to secure their own property, when they might otherwise be locked out of the market. If you are unsure whether you should try to save up a larger down payment to avoid this insurance, or accept the cost to enter the market sooner, get in touch with your mortgage broker! We can provide you with all the details and guidance you need to make the right decision for you.

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.