Mortgage Default Insurance in Canada, and How Much Does It Cost
Understanding Mortgage Default Insurance
Mortgage default insurance is a financial product that homebuyers are required to purchase if their down payment is less than 20% of the purchase price of the property. Mortgage default insurance is designed to protect lenders from the risk of borrower default. In such a case, the insurance provider compensates the lender for the loss, up to the policy limit.
The cost of this insurance, known as the premium, is calculated as a percentage of the mortgage amount. The premium rate depends on various factors, including the size of the down payment and the loan-to-value ratio. The smaller the down payment, the higher the premium rate.
The Loan-to-Value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of the purchased asset. In the context of mortgage default insurance, the LTV ratio is the size of the mortgage compared to the value of the property. The higher the LTV ratio, the higher the risk for the lender, and thus, the higher the cost of the insurance.
The premium does not need to be paid upfront and is typically added to the mortgage amount and is paid off over the life of the loan. This means that the borrower pays the premium as part of their regular mortgage payments.
It’s important to note that mortgage default insurance does not protect the borrower. It does not cover mortgage payments in case of job loss, illness, or other personal circumstances that might prevent the borrower from making their mortgage payments. It only protects the lender in case the borrower defaults on the loan.
The Role of Default Insurance Providers
In Canada, there are three major providers of mortgage default insurance: the Canada Mortgage and Housing Corporation (CMHC), Sagen MI Canada Inc. (formerly Genworth MI Canada Inc.), and Canada Guaranty. These providers play a crucial role in the Canadian housing market by enabling Canadians to buy homes with a smaller down payment.
Unique Features of Each Provider
Canada Mortgage and Housing Corporation (CMHC)
CMHC is Canada’s national housing agency and the most recognized provider of mortgage default insurance given its government-backed status. It offers a range of products, including the program for first-time buyers with 5% down payment, purchase plus improvement program, program for self-employed, newcomers to Canada, programs for rental properties, etc.
Sagen MI Canada Inc.
Sagen MI Canada Inc., formerly known as Genworth MI Canada Inc., is the largest private sector residential mortgage insurer in Canada. It offers several programs, including the program for buyers with 5% down payment, program for newcomers to Canada, and program for using RRSP savings as pert of the down payment. Each program has its own set of eligibility criteria and premium rates.
Canada Guaranty
Canada Guaranty is the only 100% Canadian-owned private mortgage insurance company. It offers a range of products, including the program for first-time buyers with 5% down payment, as well as second homes with 5% down payment, the program for buyers to roll home improvement costs into their mortgage with as little as 5% down, the program for self-employed applicants, etc. Each product has its own set of eligibility criteria and premium rates.
Calculating Default Insurance Premiums
The premium for mortgage default insurance is calculated as a percentage of the mortgage amount and is based on the size of the down payment. The smaller the down payment, the higher the cost of the insurance. Here are their standard premium tiers, not including the specialty programs for low documentation, rentals, etc., which would have a higher premiums:
CMHC Premium Tiers
CMHC mortgage insurance premiums are as follows:
- For mortgages with a loan-to-value (LTV) ratio of 65% or less, the premium is 0.6%.
- For LTVs of 65.01% to 75%, the premium is 1.7%.
- For LTVs of 75.01% to 80%, the premium is 2.4%.
- For LTVs of 80.01% to 85%, the premium is 2.8%.
- For LTVs of 85.01% to 90%, the premium is 3.1%.
- For LTVs of 90.01% to 95%, the premium is 4.0%.
Sagen Premium Tiers
Sagen mortgage insurance premiums are as follows:
- For LTVs up to 65% the premium is 0.6%.
- For LTVs of 65.01% to 75%, the premium is 1.7%.
- For LTVs of 75.01% to 80%, the premium is 2.4%.
- For LTVs of 80.01% to 85%, the premium is 2.8%.
- For LTVs of 85.01% to 90%, the premium is 3.1%.
- For LTVs of 90.01% to 95%, the premium is 4.0%.
Canada Guaranty Premium Tiers
Canada Guaranty mortgage insurance premiums are as follows:
- For LTVs up to 65% the premium is 0.6%.
- For LTVs of 65.01% to 75%, the premium is 1.7%.
- For LTVs of 75.01% to 80%, the premium is 2.4%.
- For LTVs of 80.01% to 85%, the premium is 2.8%.
- For LTVs of 85.01% to 90%, the premium is 3.1%.
- For LTVs of 90.01% to 95%, the premium is 4.0%.
The Process of Obtaining Mortgage Default Insurance
Mortgage default insurance is typically arranged by the lender, not the borrower. When a homebuyer applies for a mortgage, the lender assesses the application based on various factors such as the borrower’s credit score, income, and the size of the down payment. If the down payment is less than 20% of the purchase price, the lender will require mortgage default insurance.
The lender applies for this insurance on behalf of the borrower. The insurance provider then assesses the application based on their own underwriting guidelines. If approved, the insurance premium is added to the mortgage amount and is paid off over the life of the loan. The borrower does not need to pay this premium upfront.
It’s important to note that while the lender arranges the insurance, the insurance coverage protects the lender, not the borrower. If the borrower defaults on the mortgage, the insurance provider compensates the lender for the loss.
Conclusion
This article is a brief overview of the mortgage default insurance when obtaining a mortgage. Understanding the cost of mortgage default insurance and the factors that influence it is an important consideration for anyone planning to buy a home in Canada. It’s always a good idea to consult with a mortgage professional to get a clear understanding of all the costs involved in buying a home.
At TheBroker.ca Ltd., we understand the importance of providing accurate information regarding each step of the mortgage process so our clients will have everything they need to make informed decisions about their mortgage options. If you have any questions or need further information, don’t hesitate to reach out to us, we are always ready to assist you with your mortgage needs.
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Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
