Importance of Mortgage Default Insurance in Canada!

Zoltan PadarUncategorized

Mortgage insurance

If you are currently in the market for a mortgage, you should be familiar with the term “mortgage default insurance.” 

 For those who aren’t, or if you need a bit of a refresher, I will outline some of the basics about mortgage default insurance and how it can impact the rates available to you. 

 First and foremost, it’s essential to differentiate mortgage default insurance from creditor insurance. 

 The former protects the lender if the borrower defaults on their mortgage and is mandatory for all mortgages where the borrower has a down payment of less than 20%.  

 Creditor insurance, on the other hand, is an optional insurance that can be purchased by the borrower and provides peace of mind for family members or co-borrowers by covering a portion or all of the remaining mortgage balance in the event of the mortgage holder’s death. 

 What type of mortgage do you need?

 When shopping for a mortgage, you’ll find rates available for three main kinds: insured, insurable, and uninsured. Here’s a run-down of all three:

Insured mortgages

 Insured, or “high-ratio” mortgages, are generally those where the buyer provides a less than 20% down payment.Therefore, mortgages where the loan-to-value is between 80.01% and 95%. 

 By Canadian law, those lenders providing these types of mortgages, they must be default-insured by one of Canada’s three primary default insurance providers: Canada Mortgage and Housing Corporation (CMHC), Sagen or Canada Guaranty. 

 Contract rates for insured mortgages are typically among the lowest available since the insurance provider is taking on the risk of default rather than the lender, lowering the lender’s cost of funding. However, when comparing overall expenses, it’s essential to factor in the price of insurance for insured mortgages, which is typically rolled into the total mortgage amount and doesn’t have to be paid upfront. Certain provinces do, however, charge tax on the insurance amount, which must be paid at the time of closing. 

 Restrictions that apply to insured mortgages include a maximum property value of $1 million, a maximum amortization of 25 years, and the property must be located in Canada, standard debt qualification ratios apply, refinances are not applicable, and the property must be owner-occupied. 

Insurable mortgages

 Insurable mortgages are, instead of borrowers the lenders are responsible for insuring these mortgages, which is generally done through back-end bulk insurance. 

 The same restrictions listed above for insured mortgages also apply to insurable mortgages, with one difference being that the loan-to-value cannot exceed 80%. 

Uninsured mortgages

 These loans cannot be guaranteed by the government or private insurers, which means the lender must assume all of the risks in the event of default by the borrower. As a result, contract rates for uninsured mortgages are the highest of the three. 

 Mortgages that cannot be insured include applications where the purchase price exceeds $1 million, those with amortizations above 25 years, multi-unit rental properties, and mortgage refinances. 

 Renewals and Transfers

 As you can see, mortgage default insurance can affect the best rates available. It may create an opportunity for you if you currently have an insured or insurable mortgage, as lenders may also offer competitive rates for some existing borrowers. If your mortgage is coming up for renewal in the next 6-12 months, it would be beneficial to confirm if your mortgage is insured or insurable, and I would be happy to do that for you.

Never hesitate to ask. Mortgage knowledge is priceless, after all for most people this type of financial agreement is the biggest in their lives. Please visit our sites what you think applies to you and do not be shy, call 403-253-2022, text 403-616-9114, email [email protected] or visit us online FREE Consultation Realtors Advice OUR TEAM Apply Online