Mortgage default insurance, commonly referred to as mortgage insurance, helps homebuyers achieve their dream of buying their own home sooner and without a large down payment.
It is a mandatory insurance that protects the lender if you default on your mortgage agreement, provided by Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada and Canada Guaranty Mortgage Insurance Company.
Mortgage default insurance is required when your down payment is less than 20 per cent of the purchase price or the appraised value of the home and this type of mortgage is referred to as a high-ratio mortgage.
The purchase price must be less than $1 million and if you require high-ratio insurance the amortization cannot exceed 25 years.
Mortgage default insurance does not protect the borrower or the guarantor. It is for the benefit of the lender and when mortgage insurance is required it is the lender who arranges for the coverage and the premium is added to your mortgage and amortized over the life of the mortgage.
The insurance protects the lender should the mortgage go into default.
A mortgage is generally considered to be in default if payments are not made as agreed.
When an insured property is sold as a result of mortgage default and the sale does not cover the outstanding balance and all costs, the insurer will pay the shortfall to the lender and then has the right to enforce against the borrowers for the deficiency.
The insurance premium is calculated as a percentage of the mortgage amount and the higher the loan to value ratio is, the higher the insurance premium will be. Premiums range from 0.60 to 3.85 per cent for fully qualified mortgages.
The mortgage default insurance premiums are not refundable if your mortgage is paid off early but if you are porting the mortgage to a new home or switching your mortgage to another lender you may be eligible to transfer the insurance.
Let’s look at an example of how the insurer calculates the insurance premium. The purchase price/value of a property is $300,000 and a down payment of $30,000 will result in a loan to value ratio (LTV) of 90 per cent and a mortgage amount of $270,000.
The default insurance premium rate will be 2.4 per cent. Insurance premium: $270,000 x 2.4% = $6,480 for a total mortgage of 276,480 amortized over 25 years.
Mortgage default insurance should not be mistaken for mortgage life insurance. Mortgage life insurance is an option purchased by the borrower for the benefit of the borrower.