What is mortgage default insurance in Canada?
What is Mortgage Default Insurance?
Mortgage default insurance, also known as mortgage insurance, is a type of insurance that is required by law for all homebuyers in Canada who have a down payment of less than 20% of the purchase price of the home.
This insurance is designed to protect the lender in case the borrower defaults on the mortgage loan.
Benefits of Mortgage Default Insurance:
- It allows homebuyers to purchase a home with a down payment of less than 20%, which may be difficult for some people to save up.
- It protects the lender in case the borrower defaults on the mortgage loan, which makes it easier for lenders to offer mortgages to homebuyers with less than 20% down payment.
- It provides peace of mind for both the borrower and the lender, knowing that the mortgage loan is insured.
Downsides of Mortgage Default Insurance:
- The borrower is required to pay an insurance premium, which increases the overall cost of the mortgage loan.
- The insurance only protects the lender, not the borrower, in case of default.
- The insurance premium is a one-time cost but it is added to the mortgage amount, which increases the overall interest cost of the loan.
Example: Let’s say you are a first-time homebuyer in Canada and you want to purchase a home for $500,000.
You have a down payment of $40,000, which is 8% of the purchase price.
Since your down payment is less than 20%, you are required by law to purchase mortgage default insurance.
The insurance premium for this type of mortgage is calculated as a percentage of the mortgage amount.
In this case, the mortgage amount would be $460,000 (the purchase price minus the down payment).
The insurance premium would be 4.00% of the mortgage amount, which comes out to $18,400.
This premium can be paid upfront or added to the mortgage amount.
Conclusions and Further Thoughts
The benefits of purchasing mortgage default insurance in this example are that you are able to purchase a home with a smaller down payment, and the lender is protected in case you default on the mortgage loan.
However, the downside is that you would have to pay a premium of $14,260, which would increase the overall cost of the mortgage loan.
Contact Huber Mortgage to talk through your options! Contact HERE.
Sincerely,
Michael
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE
