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Under the federal statutes governing them, federally-regulated financial institutions (FRFIs) are required to obtain mortgage insurance (mortgage default insurance) for homebuyers whose down payment is less than 20% of the property value. The homebuyer is responsible for paying the premium for this insurance. The insurance is meant to protect the lender against loan losses in case of defaults.
Homebuyers also benefit from an insured mortgage in that they are able to make home purchases even with 5% down payment. This enables homebuyers who would otherwise not get the heft 20% down payment to fulfill their dreams. The best mortgage insurance Canada also allows lenders to offer such benefits as lower interest rates on loan updates and at renewal.
In case of default, the mortgage insurance covers 100% of the claim from CMHC (Canada Mortgage and Housing Corporation), which is a federal corporation. The private mortgage insurance providers also get government backing, subject to some deductibles.
Government regulations establish how the actual cost of mortgage default insurance is calculated, and they outline permitted exceptions. Note for purchases of over $1 million, you will require the entire 20% down payment. For less than $500,000, anything between 5% and 20% down payment. For $500,000 to $999,999, 5% of the first half a million, and 10% of the rest.
In this article, we shall look at what it means to default on a mortgage, see the difference between conventional mortgages and insured mortgages, and see who provides this insurance in Canada. We shall do a deep dive into what mortgage insurance means to the economy, look at the 5% minimum rule, see if this insurance is mandatory, look at mortgage disability insurance, see the difference with home buyers insurance, and see if it is possible to cancel the insurance. We shall also see how one can benefit from engaging a professional in the entire mortgage process.
INSURED MORTGAGE vs CONVENTIONAL MORTGAGE
Understanding Insured Mortgages in Canada
What does it mean to have an insured mortgage? Under section 418.1 of the Bank Act, all FRFIs (federally-regulated financial institutions) that lend money to purchase, improve, refinance, or renovate a residential property are required to obtain 20% of the property’s value as a down payment. This is called a conventional mortgage. However, this amount is prohibitive to most homebuyers. Thankfully, Section 418.2 introduces some exceptions that allow lenders to provide mortgages with an LTV (loan-to-value) ratio of over 80%, provided the excess amount is insured by an insurer who is approved by the superintendent of financial institutions.
The higher the down payment, the lower the mortgage insurance you will pay at the end of the day. You will pay 4% of the mortgage amount if you pay a down payment of between 5% – 9.99%. For a down payment of between 10% – 14.99%, you will pay mortgage insurance worth 3.10% of the mortgage amount. If you pay a down payment of between 15% – 19.99%, you will pay mortgage insurance worth only 2.80% of the mortgage amount. For a down payment of over 20%, no insurance is payable. Check if you are eligible for a down payment assistance program to get a higher down payment.
Note that other than the insurance premiums, you will also pay interest. This is either paid upfront or added to your mortgage. You also pay sales tax on the mortgage insurance premiums for homes in Ontario, Quebec, and Saskatchewan.
What does mortgage insurance cover in Canada?
Mortgage insurance protects the lender in case of default by the homebuyer. There are 2 types of mortgage insurance covers that are offered by the providers. The premiums can be paid by the lender (though with a higher interest rate), or you could pay premiums on the insurance directly.
- For transactional insurance, you pay one-time premiums. This is designed for borrowers with an LTV ratio over 80%. This premium is usually embedded in your mortgage when the mortgage is being advanced.
- Portfolio insurance, also called bulk insurance, is paid by the lender for individuals with an LTV of less than 80%. As a borrower, you may not even know that the cover has been bought.
Who insures mortgages in Canada?
There are 3 providers of mortgage insurance in Canada. The 3 are regulated by a superintendent under the Insurance Companies Act. While OSFI is responsible for conducting prudential reviews to determine financial soundness, the provinces are responsible for regulating the licensing of the insurance providers in their jurisdictions and in marketing insurance products.
- CMHC (Canadian Mortgage and Housing Corporation): This is a Crown corporation, and it often sets the policy and tone for the other insurers.
- Sagen (formerly Genworth Financial Mortgage Insurance Company): This is a private default insurance provider.
- Canada Guaranty Mortgage Insurance Company: Also a private mortgage insurance Canada provider.
These 3 providers are similar in many ways, but having 3 providers is advantageous in that they have some differences in policy that can lead to the approval or rejection of a mortgage application.
Insured Mortgage Vs Conventional Mortgage
The differences between conventional mortgages and insured mortgages are:
- It is mandatory that you get mortgage insurance if your down payment is less than 20%. There is no legal requirement that you get mortgage insurance if you are getting a conventional mortgage.
- With a conventional mortgage, the lender pays the mortgage default insurance. With an insured mortgage, the borrower covers the cost of the insurance.
- Insured mortgages are more expensive, given it is the borrower who is covering the cost of the insurance. The difference in cost between insured and conventional mortgages is usually between 0.2% and 0.3%.
- It is easier to get an insured mortgage. Regulations are more stringent with conventional mortgages. This makes insured mortgages more popular for those with poor credit scores, low-income earners, those who have other debts, those who are recovering from bankruptcy or other financial woes, or who do not meet the eligibility criteria or A-lenders for one reason or the other.
WHAT DOES MORTGAGE INSURANCE COVER IN CANADA?
- Mortgage insurance pays off mortgage debt to the lender should something happen to the borrower, such as death. The insurance cover is provided by one of three lenders.
- Mortgage insurance encourages stability in the mortgage market. The stringent regulations in Canada are the reason the country did not face a foreclosure crisis as was experienced in the U.S. in 2007/2008. The stability allows lenders and insurance providers to be in business and borrowers to fulfill their dreams of home ownership.
- The law gives an exemption, where you can make a down payment of as low as 5%.
- Mortgage insurance encourages stability in the mortgage market.
- Insurance protects your family in case of death.
- If you want to move to a conventional mortgage, you can change.
- The interest rates are not too far off from what is offered for conventional mortgages.
- If you take out a mortgage refinance to make your home more energy-efficient, there are government programs that can give you up to a 10% refund.
- There are portable mortgages that you can transfer to a new property.
The Role of Mortgage Insurance in Canada
What does mortgage insurance cover in Canada? Mortgage insurance is meant to cushion the lender, but it also has benefits for borrowers. Life term insurance offers better mortgage debt protection to the borrower.
Benefits to the Lender
Mortgage insurance pays off mortgage debt to the lender should something happen to the borrower, such as death. The insurance cover is provided by one of three lenders.
Mortgage insurance encourages stability in the mortgage market. The stringent regulations in Canada are the reason the country did not face a foreclosure crisis as was experienced in the U.S. in 2007/2008. The stability allows lenders and insurance providers to be in business and borrowers to fulfill their dreams of home ownership.
Benefits to the Borrower
The law requires that lenders only lend out 80% of the property value, the remainder to be provided by the borrower in the form of a down payment. If you do not have the 20% down payment, you will be locked out from owning a home. However, the law gives an exemption, where you can make a down payment of as low as 5%, provided your mortgage is insured. Without insured mortgages, many Canadians, such as those who are fresh out of college or new in Canada, would be forced out of the housing market.
Insurance protects your family in case of death. For example, if you have a mortgage worth $500,000 and you have made a 15% down payment with an amortization period of 30 years, should you pass on within this period, your estate would still be required to have the balance of $425,000, which you will not have paid.
If you have mortgage loan insurance in Canada and want to move to a conventional mortgage, you can change, which allows you to enjoy lower rates.
The interest rates are not too far off from what is offered for conventional mortgages. Insured mortgages (high-ratio mortgages) usually get better interest rates compared to uninsured mortgages.
If you take out a mortgage refinance to make your home more energy-efficient or buy an energy-efficient home, there are government programs that can give you up to a 10% refund on the mortgage insurance premium.
There are portable mortgages that you can transfer to a new property, meaning you will end up saving on your premiums when you move.
Private Mortgage Insurance Canada
Who provides mortgage insurance in Canada? The 3 mortgage insurance lenders in Canada are Canadian Mortgage and Housing Corporation (CMHC), which is a state corporation, Sagen, and Canada Guaranty Mortgage Insurance Company. Mortgage insurance is sometimes called CMHC insurance, but 2 private lenders also play an important role in the market.
There are 2 types of private mortgage insurance (PMI). With borrower-paid PMI, the premiums are factored into the monthly mortgage payment until you pay 80% of the home’s value. With lender-paid PMI, the lender pays for the insurance but then charges you a higher interest rate.
Other than the loan-to-value (LTV) ratio, other factors that influence the cost of private mortgage insurance in Canada are your credit score and the loan type, with adjustable-rate mortgages attracting a higher cost.
The 5% Minimum Rule for Insured Mortgages
The law has set a minimum down payment of 5% of the purchase price for homes worth $500,000 or less. For homes worth $500,000 to $999,999, the minimum down payment is 5% of the first $500,000 and 10% for the remaining portion. For properties worth over $1 million, a 20% down payment is required.
Do I Need Mortgage Insurance If I Have Life Insurance?
Note mortgage insurance is not guaranteed. So, as an example, if a loved one who has a mortgage dies and it is discovered he/she had an undisclosed health condition, it will most likely not be paid out. With term life insurance, you get guaranteed coverage.
While mortgage insurance settles one’s mortgage if the borrower dies, other products are better at safeguarding a mortgage debt. Mortgage insurance is mandatory if you do not meet the 20% down payment criteria. While mortgage insurance protects the lender, you should consider going for term life insurance to protect your family from mortgage debt. Your beneficiaries will get a tax-free death benefit. Note that you get to choose the beneficiaries and how the payout will be used with term life insurance.
BANK MORTGAGE INSURANCE VS LIFE INSURANCE
Additional Considerations for Mortgage Insurance
If you cannot afford a 20% down payment on the value of your home, the law requires that you get mortgage default insurance. Note that this does not apply to homes worth over $1 million, where a 20% down payment is a requirement. The insurance premiums are combined with your mortgage premiums. Other than CMHC and private mortgage insurance in Canada, there are other insurance options available to buyers.
Using Life Insurance to Buy a House in Canada
You can use your life insurance as collateral for a mortgage when buying a home. You will use the death benefit of the policy to secure the mortgage. This means that should you die before you clear your mortgage, the death benefit payout of your life insurance pays off the mortgage.
Bank Mortgage Insurance Vs. Life Insurance
Independent life insurance has several benefits over mortgage insurance from banks:
- Although it is easier and quicker to get mortgage insurance compared to life insurance, you should consider life insurance because it is guaranteed upon approval. This means that should you die, your beneficiaries are sure they will receive the benefits. Mortgage insurance is post-underwritten. This means an investigation into eligibility is made after the claim is made, and there is a risk of disqualification. For example, if it is discovered that you did not disclose a pre-existing medical condition, your mortgage will not be paid off, and your dependents will be obligated to pay off the balance of the mortgage.
- Mortgage insurance is not always portable with mortgage refinance or house changes. You will need a new mortgage insurance cover with your new policy, meaning you will not get the full benefits of the refinance. You get to keep your life insurance policy even when you change lenders, move to a new home, or pay off your mortgage.
- Mortgage insurance premiums range from 0.60% to 4.50%, depending on your loan-to-value (LTV) ratio and down payment. The premiums are added to your mortgage premiums. Life insurance can be cheaper, with more features and greater flexibility.
- You get to name your beneficiary with a life insurance policy. Your beneficiaries have the flexibility to pay off the mortgage when the time is right. The focus of mortgage insurance is to pay off the mortgage, no matter your family’s situation.
- Mortgage insurance benefits decline as the balance of the debt reduces (declining benefit) and will be completely gone once you pay off the mortgage. With life insurance, the benefits are constant throughout the term or your lifetime.
- With a pre-underwritten policy, you can get a “preferred” rate based on your health. With mortgage insurance, only a few medical questions are asked, and those in perfect health and those less healthy usually get the same rates.
- You can combine life insurance with other benefits like child care, income replacement, accidental death benefit, and critical illness rider to get tiered discounts. Mortgage insurance only insures your mortgage.
Critical Illness Mortgage Insurance and Mortgage Disability Insurance in Canada
Mortgage disability insurance, which has a maximum payout of between $3,000 and $3,500 per month for 2 years, will cover your mortgage payments should you become disabled and unable to work. The payout can cover part or all of the mortgage repayment, depending on your premiums and policy. This insurance has a 60-day waiting period.
If you have critical illness insurance, you will get a lump-sum payment should you be diagnosed with a covered illness (such as heart disease, stroke, or cancer). Mortgage critical illness insurance payout can go towards offsetting your mortgage loan.
Can You Cancel Mortgage Insurance in Canada?
Mortgage insurance is not mandatory if you meet the 20% down payment threshold. You can cancel mortgage insurance once you attain 20% equity on your home, but like with all insurance plans, you should only cancel if you have an alternative coverage to replace it.
Navigating the Insured Mortgage Landscape in Canada
Is mortgage insurance mandatory in Canada? For most Canadians, a mortgage is the biggest investment they will make in their lifetime. The law requires that borrowers provide 20% of the value of the home as a down payment. For those who cannot afford a 20% down payment, Section 418.2 of the Bank Act introduces an exemption – borrowers who buy homes worth half a million dollars can pay a 5% down payment, and those who buy homes worth between half a million dollars and 1 million dollars can pay 5% down payment on the first half a million, and 10% down payment on the balance. Note those buying homes worth over 1 million dollars have to pay a 20% down payment.
What is an insured mortgage?
The catch for those who get an exemption under Section 418.2 of the Bank Act is that they have to get an insured mortgage. The costing of mortgage default insurance is done in 3 ways:
- Premiums: The premiums payable are based on your down payment. With CMHC mortgage insurance, you will pay 4% of the principal for a down payment of between 5% and 9.99%. The premium reduces to 3.1% for a down payment of between 10% and 14.99%. For a down payment of between 15% and 19.99%, you will pay premiums worth 2.8% of your principal.
- Interest: You will have to pay interest on the insured mortgage.
- Sales tax: Mortgage insurance premiums for homes in Quebec, Saskatchewan, and Ontario attract sales tax.
Note that even with mortgage insurance, you still have to meet the eligibility criteria for getting a mortgage. These include a strong credit score, a total debt service (TDS) ratio of 44%, a maximum gross debt service (GDS) ratio of 39%, an amortization period of less than 25 years, and a down payment sourced from self, from your investments, or from a gift (it must not be borrowed). Note if you don’t qualify with an A lender (bank or credit union), you can go with a B lender.
The Importance of Insured Mortgages in the Home Buying Process
Mortgage insurance protects the lender in case of your demise while your mortgage is still outstanding. The insurer will pay the remainder of the mortgage loan to the lender. This has greatly stabilized the housing market in Canada.
Borrowers also stand to benefit from insured mortgages in that those who are not able to raise a 20% down payment, which is a hefty amount, can fulfill their dream of home ownership. In case of death, the estate of the departed is shielded from taking over the mortgage debt.
Is Mortgage Insurance in Alberta Good for Me?
You should consider your own needs and circumstances when considering mortgage insurance. If you can afford a 20% down payment, then there is no need to pay the premiums and interest that come with mortgage insurance. If you are straight out of school, you have insufficient income, or you are not able to raise the 20% down payment, then mortgage insurance is your best bet.
Consider hiring a professional to assist you in navigating through the insured mortgage landscape. At Certified Mortgage Brokers, we partner with the best mortgage brokers in Toronto and the Greater Toronto Area to help you get the best possible interest rates. Our experienced team will help you understand the entire mortgage process, including assisting you in meeting the eligibility criteria, and will match you with a lender, even if you have a poor credit score.
Other than assisting you with mortgage insurance, we also assist with self-employed mortgages, mortgage refinance, home equity take-outs, mortgage transfers, second mortgages, and U.S. mortgages for Canadians, among others. Call us today at +1 866 921 8890 or email us at [email protected] for more details on our services and to start your journey towards home ownership.
