If you’re thinking about purchasing a home - and you plan to take out a mortgage in order to make that dream a reality - then there’s something you need to know about. And that’s mortgage insurance.
You’ve probably heard the term “mortgage insurance” before, but if you’re like most first-time homebuyers, you might not know exactly what mortgage insurance is all about. What is mortgage insurance? Is it required or optional? And do you REALLY need it?
Mark Cashin of Oakville mortgage brokers Cashin Mortgages, is here to demystify mortgage insurance and school you on the basics so you can make the best decision when it comes to securing insurance for your mortgage. He's an expert and has some great insight to share for the Canadian market as an interesting spin on the subject.
What Is Mortgage Insurance?
According to Wikipedia, mortgage insurance is “an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.” Or, in other words, it’s an insurance policy that protects your mortgage lender should you ever default or stop making payments on your mortgage.
Do You Need Mortgage Insurance?
If you plan to put less than a 20% down payment on your home, you need mortgage insurance. Thanks to the Canadian Bank Act, mortgage insurance - which is typically referred to as CMHC (Canada Mortgage and Housing Corporation) insurance in Canada - is mandatory and required by law for any home buyers with a down payment between 5% (the Canadian minimum) and 19.99%.
If you have a down payment above 20%, you’re not required to secure mortgage insurance.
There are a few requirements you’ll need to meet to qualify for mortgage insurance, including:
The purchase price of the home must be below $1million (for homes that are priced above $1million, buyers must put down at least a 20% down payment)
You have at least 5% to put down for a home that is $499,999 or less; if the home is $500,000 or above, you’ll need at least 10% for the down payment
Your total debt load should not exceed 40% of your gross household income
Who Pays For Mortgage Insurance?
Even though mortgage insurance technically protects the lender, the cost falls on you - the buyer. So, if you need to secure a mortgage insurance policy, you’re going to be the person paying for it.
That being said, mortgage insurance is a worthwhile expense. Mortgage insurance is directly responsible for granting people who don’t have a large down payment - people who previously would be unable to purchase a home - the ability to secure a loan and realize their dream of homeownership. Thanks to mortgage insurance, lenders are able to offer lower mortgage rates on loans with lower down payments since the risk of default falls on the insurer, not the lender. Without mortgage insurance, mortgage rates for buyers with a lower down payment would be restrictively high, making owning a home an impossibility for many Canadians.
How Much Will You Pay For Mortgage Insurance?
How much you pay for mortgage insurance will depend on how much money you have for a down payment. Lenders typically look at buyers with a lower down payment as more risky than buyers with a higher amount to put down towards their purchase. So the higher your down payment, the less you’ll pay for mortgage insurance.
As of 2017, the mortgage insurance rates are as follows:
Down payment of 5% - 9.99%: 4%
Down payment of 10% - 14.99%: 3.10%
Down payment of 15% - 19.99%: 2.8%
Down payment of 20% or above: 0
So, for example, let’s say you purchased a home for $450,000 and put $40,000 towards a down payment. Your mortgage would be the purchase total ($450,000) minus the down payment ($40,000), which equals $410,000.
To determine your mortgage insurance premium rate, you’d need to calculate what percentage you put down on the home. So, you would divide the down payment ($40,000) by the purchase total ($450,000), which equals .0975, or a 9.75% down payment.
A 9.75% down payment would mean you were responsible for a 4% mortgage insurance premium rate. So, you would take the total of your mortgage ($410,000) and multiply it by your mortgage insurance rate (4%), which is $16,400.
Now, luckily, you’re not responsible for the entire total of your mortgage insurance up front. In fact, you don’t need to put anything towards your mortgage insurance immediately. Instead, that total is rolled into your mortgage and you pay your total premium over the length of your mortgage. So, instead of making payments on a $410,000 mortgage, you would be making payments on a $426,400 mortgage (the original $410,000 mortgage plus the $16,400 premium).
If you want to lower your mortgage insurance premiums, you’ll need to come up with a higher down payment. Otherwise, expect to pay the full premium over the course of your mortgage.
Mortgage insurance can be confusing. But understanding mortgage insurance is essential in making the best decisions when purchasing a home in Canada.
For more details on the requirements for mortgage insurance, visit Mark Cashin Mortgages.