Understanding Mortgage Default Insurance
Mortgage Default Insurance, commonly referred to as Mortgage Insurance, allows homebuyers to achieve the dream of homeownership with a low down payment.
There are two types of mortgage options:
1. Conventional Mortgages - on loans with a minimum 20 per cent down payment
2. High-Ratio Mortgages - on loans with a less than 20 per cent down payment
In Canada, mortgage insurance is required federally on high-ratio mortgages – that is, mortgages with a down payment of 20 per cent or less. This insurance, which protects the lender in case of borrower default, gives lenders the flexibility to offer borrowers with low down payments the same low interest rates they would offer to homebuyers with more equity.
Mortgage insurance premiums are based on the amount of the mortgage and although they can be paid in a lump sum upon closing, they are normally added to the mortgage amount and paid over the length of the mortgage.
This insurance is not to be confused with mortgage life insurance which protects homeowners and their families in the event of death or illness.
There are three Mortgage Insurance companies in Canada:
1. CMHC - a federal Crown corporation that administers the National Housing Act (NHA). Among other services, they also insure mortgages for lenders that are greater than 80% of the purchase price or value of the home.
2. Genworth - a private mortgage insurance company.
3. Canada Guaranty - also a private mortgage insurance company.
Although these are three separate entities, they all exist to protect the lender while helping the homeowner. In fact, did you know Genworth has a Homeowner Assistance Program that is designed to help homeowners who are experiencing temporary financial difficulties as the result of an unexpected life event, which may put their mortgage at risk? This program enables you to work in partnership with them to establish alternative arrangements to help you stay secure in your home when times get tough.
This is just one example, but keep in mind that CMHC and Canada Guaranty also work with the lender, mortgage professional, and homeowner to find alternative solutions when the going gets tough. However, if you do not reach out when you might see trouble on the horizon it may be too late - don't hesitate to make the call to your mortgage professional because there are options available and more so when you keep one step ahead of financial hardship.
Sources: Genworth Canada & CMHC