What is an Insured Mortgage in Canada

Purchasing a home is one of the most significant investments you can ever make. If you plan to buy a home, you have probably started saving some money for the down payment. The amount of money you need to save will depend on the minimum down payment as well as the amount you can afford to save. What most borrowers might not know is that the amount they contribute as a down payment can determine whether they need mortgage insurance or a mortgage broker in Toronto.

What is mortgage insurance Canada?

How does mortgage insurance work in Canada? If you put less than 20% down payment when purchasing a home, you will need default insurance (mortgage insurance). An insured mortgage is also known as a high-ratio mortgage. This is a mortgage covered by mortgage default insurance. This insurance protects the mortgage lender against foreclosure and default. Mortgage insurance automatically applies to mortgages that have a down payment of less than 20% or a Loan-to-Value, abbreviated as LTV, of more than 80%. However, mortgage insurance might also be necessary for other unique situations.

The good thing about mortgage insurance is that without it, it would be impossible to purchase a home if you can’t manage to raise a down payment of at least 20%. The lender could also be willing to offer you additional benefits because the mortgage is insured. The additional benefits include more flexible repayment options and a lower interest rate.

What does mortgage insurance cover in Canada? The insurance protects the lender if they are unable to make the loan payment. The cost of mortgage insurance varies depending on the mortgage amount and your down payment. The higher the down payment you make, the less you will pay in mortgage insurance.

The Amount You Need For Down Payment

The minimum amount you need for a down payment depends on the price of the home you intend to buy. You pay the down payment in advance, and the amount is deducted from the cost of your home, while the mortgage caters to the remaining cost. You have to make a down payment of at least 5% if the price of your home is less than $500,000. If the price of your home ranges between $500,000 and $999,999, you will put a down payment of 5% for the first $500,000 of the purchase price. You will then make a down payment of 10% for the remaining price above $500 000. However, if your home costs more than $1 million, you need a 20% down payment on the purchase.

You may need to put in a down payment of more than 20% if the mortgage lender considers you high risk. For example, buyers with a poor credit history or self-employed people may need to put in a higher down payment.

The common sources for a down payment in Canada include RRSP withdrawal, personal savings, sale of other property, non-repayable gifts from immediate family members, ad funds borrowed against proven assets. It is no longer possible to obtain money for down payments from sources like a personal loan or a line of credit.

Whether All Mortgages Are Insured In Canada

Are all mortgages in Canada insured? No, not all mortgages are insured. You will only need to insure your mortgage if you make a down payment of less than 20%. Provided you make a down payment of at least 20%, you will qualify for a conventional mortgage, which does not need insurance.

Who Insures Mortgages In Canada?

Three private insurers insure mortgages in Canada:

• Canada Mortgage and Housing Corporation abbreviated as CMHC –is a federal Crown corporation. This is the most popular mortgage insurance in Canada. Therefore, insured mortgages are also known as CHMC mortgages.
• Canada Guaranty
• Sagen, formerly known as Genworth.

You do not need to select a mortgage insurer. The lender will select an insurer on your behalf. You do not have to worry about choosing a suitable insurer. It is ideal to make a down payment of at least 20%. However, the fact that you cannot afford the 20% down payment does not mean that you should not become a homeowner. Mortgage default insurance allows you to become a homeowner, even when you make as little as 5% down payments.

You Must Still Pay Your Mortgage Even After Insuring It

You will still be on the hook to repay your mortgage even if it is insured. If you fail to repay your mortgage, you could still lose your home through foreclosure. In case you default, the lender can sell your house, recover the money, and the insurer will compensate the lender for any shortfall in the principal amount. For example, the lender could sell your home for a price lower than the outstanding mortgage. In this case, the insurer will compensate the lender for the shortfall. Mortgage default insurance makes the loan more secure and reduces the lender’s exposure.

Without mortgage insurance, the lender might be unwilling to take on a riskier mortgage with a down payment of less than 20%. Therefore, mortgage insurance enables lenders to offer mortgages to more people, making it possible to obtain a mortgage even with a down payment of just 5%.

Insured Mortgage vs. Uninsured Mortgage Canada

Compared to conventional uninsured mortgages, insured mortgages have the following benefits:

• Gives you access to homeownership even when you have a down payment of less than 20%. In some cases, mortgage lenders will grant you a mortgage even with a down payment of 5%.
• With insured mortgages, lenders would be willing to give you good rates.
• Despite making a low down payment, you can still access good mortgage options, including prepayment privileges and longer mortgage terms.

You will need a mortgage broker to help you with the application details since insured mortgages have home price restrictions.

How To Pay Mortgage Insurance

Mortgage insurance providers in Canada offer two types of mortgage insurance coverage:

• Transactional insurance
• Portfolio insurance, also known as bulk insurance

Transactional insurance is a one-time insurance that is applicable to mortgages with an LTV of over 80%. However, in some situations, this premium could apply to mortgages with lower LTVs. You can pay the transactional insurance as a lump sum, and the insurance can also be added to your payments. The amount is added when the mortgage is advanced. If the premium is included in your monthly installment, it reduces as you pay off more of the principal since it is tiered.

On the other hand, bulk or portfolio insurance is ideal for mortgages that have an LTV of 80% or less. The lender obtains this insurance, and the borrower might not even be aware that this insurance has been purchased. Monoline lenders often use this insurance to avail lower mortgage rates. To some extent, banks may also consider using this type of insurance.

What Happens When You Have An Insured Mortgage, And You Move to Another Home?

Take, for example, that a lender has received your CHMC mortgage loan insurance on your property on or after April 1, 1996, and you intend to purchase another home. You may enjoy the mortgage portability option. The portability option allows repeat users of CHMC-insured mortgages to save money by eliminating or reducing the premium on the newly insured loan while purchasing another home. You should check with your mortgage lender to find out if there is an option for mortgage portability and the applicable conditions.

A Mortgage Broker

Obtaining mortgage insurance can be a bit confusing, especially if you have never applied for mortgage insurance before. A mortgage broker can work with you to help you select the best insurance option. You can pay the insurance in a lump sum and have the insurance premium included in your monthly installments. Since the payments begin immediately when the mortgage funds are advanced, it’s good to choose a payment option that suits your financial situation. If you have any questions regarding how mortgage insurance works, we invite you to contact CMB. A member of our team will be glad to contact you.