For many Canadians, buying a home often means taking out a mortgage. If you have less than a 20% down payment, you will need mortgage loan insurance as well. This mandatory insurance protects lenders in case the borrower defaults on their mortgage. Understanding how mortgage loan insurance works and when it’s required is essential for any potential homeowner. In this guide, we’ll explore the purpose, benefits and drawbacks of mortgage insurance, and its possible alternatives.
What Is Mortgage Insurance?
Mortgage loan insurance is a type of insurance designed to protect lenders when a borrower defaults on their mortgage payments. In Canada, this housing insurance is often required if you are purchasing a home with a down payment of less than 20%, which is common for first-time buyers who may not have enough savings for a larger down payment. Mortgage loan insurance protects lenders so they can offer these mortgages with lower down payments, which makes homeownership more accessible.
The cost of mortgage loan insurance is typically added to your monthly mortgage payments or can be paid as a lump sum. The premium is calculated based on the size of your down payment and the total amount of your mortgage.
Benefits and Drawbacks of Mortgage Loan Insurance
There are benefits and drawbacks to having mortgage loan insurance. One of the primary benefits is that it allows you to enter the housing market with a smaller down payment, as low as 5% in many cases. For first-time buyers, that smaller down payment can be the difference between being able to afford a home or not.
In contrast, the cost of the insurance itself can add to your overall mortgage expenses, as the premium is often included in your monthly payments.
Eligibility Requirements and Premium Calculations
To qualify for mortgage loan insurance, you need to meet certain eligibility criteria. In Canada, the mortgage must typically be for a residential property with one to four units, and the loan must not exceed 95% of the property’s value.
The size of your down payment will directly influence the premium you pay. For example, if your down payment is around 5%, you can expect to pay a higher premium than someone with a 15% down payment. Mortgage insurance premiums in Canada are usually calculated as a percentage of the total loan amount and range between 2.8% and 4.0%, depending on the size of the down payment.
When Is Mortgage Insurance Required in Canada?
The Canada Mortgage and Housing Corporation (CMHC) has established that mortgage loan insurance is required for any home purchase with less than a 20% down payment. The rule applies to mortgages from federally regulated lenders and ensures that they are protected in the event of a default, particularly when dealing with higher-risk borrowers who may not have a substantial financial cushion.
Additionally, the insurance is mandatory for high-ratio mortgages, which are those with a loan-to-value ratio above 80%. For any home purchase with a down payment of 20% or more, mortgage loan insurance is not required in Canada.
Mortgage Loan Insurance Alternatives
While housing insurance in Canada is mandatory under some circumstance, there are alternatives for those who want to avoid it. One option is to save for a larger down payment of 20%. This approach may take longer, but it can save you from the added expense of insurance premiums in the long run.
Another alternative is to explore non-federally regulated lenders, as they may offer more flexibility in terms of down payment requirements and insurance. However, these options may come with their own risks, so it’s essential to weigh the benefits and drawbacks carefully.
Mortgage loan insurance is a key component of Canada’s housing market, providing security to lenders and making homeownership more accessible. Understanding when it’s required and how it works can help you make informed decisions about your home purchase.
