When I arrange a mortgage to buy a home, do I have to get mortgage insurance?
The answer is, it depends. In Canada, mortgage insurance is mandatory when your down payment is less than 20 per cent of the purchase price of the property. This insurance provides lenders with an added layer of financial security and protects them against the risk of a potential default. As a result, they are more willing to approve mortgages for buyers who might otherwise not qualify. This means mortgage insurance makes purchasing a home more accessible for buyers.
The Canada Mortgage and Housing Corporation (CMHC) is a public agency accountable to Parliament that plays a key role in the home-buying journey of many Canadian residents. CMHC provides mortgage insurance, as do two private mortgage insurance providers – Sagen (formerly Genworth) and Canada Guaranty.
To avoid confusion, it’s important to know that mortgage insurance and mortgage life insurance are different things. Mortgage life insurance – also called mortgage protection – is insurance that pays out the balance of your mortgage if you die with a balance owing. Its purpose is to protect your family from the burden of having to make monthly payments or being forced to sell the property to cover the outstanding balance owed. This type of insurance is not mandatory.
On the other hand, the mortgage insurance you asked about – also known as mortgage default insurance or mortgage loan insurance – is designed primarily to protect the lender. If a buyer is not able to make their mortgage payments on time, the lender can take possession of the property and sell it to someone else. If the sale price of the home doesn’t cover the remaining balance of the mortgage, the insurance protects the lender from incurring a loss.
At the same time, mortgage insurance may also be beneficial to you as a buyer because you may be able to qualify for a mortgage for up to 95 per cent of the price of a property and still get a reasonable interest rate. Without such insurance, your mortgage rate would likely be higher because the lender would be exposed to risk of default.
Buying a home with a smaller down payment can add risk, especially if there’s a chance you might not be able to afford your monthly mortgage payments or if the value of the property were to fall below the total amount owing. If you’re planning to get a mortgage, I strongly recommend you review all the numbers and fine print with your mortgage broker and lawyer to ensure you’re comfortable with the terms of your lending agreement before signing on the dotted line.
If you decide to go ahead and make an offer on a home with less than a 20 per cent down payment, the mortgage insurance premium can be added to the amount of the mortgage or paid as a lump sum. The amount is calculated as a percentage of the mortgage and is based on the size of your down payment.
Note that some buyers may not qualify for mortgage insurance, based on factors such as the price of the property (it must be under $1,000,000), your debt load (how much other debt you have), your income, and closing costs when you take possession of the property.
If your application for mortgage insurance is declined, there may still be alternatives available to proceed with a purchase. That is a discussion you should have with your financial advisor or mortgage broker.
If you are thinking of buying a home and don’t have a 20 per cent down payment, your mortgage broker can help you to apply for mortgage insurance. Be sure to visit the websites of the insurance providers to learn more about their premium rates and the approval criteria.
This column is for general information purposes only and is not meant as legal or professional advice on real estate transactions.Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.