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Monday, April 22, 2024

Mortgage Default Insurance Explained

If you’ve ever been dissatisfied with your mortgage rate, it could be that mortgage default insurance is to blame. For more detailed guidance about default insurance, schedule a consultation with a local mortgage broker, but for basic information as to what it is and why you need it, here’s a brief guide:

What is mortgage default insurance?

Mortgage default insurance is a mandatory type of insurance for Canadian homebuyers who aren’t able to make a minimum down payment of at least 20% under a fully income qualified program. Put in place to help protect the lender should a borrower default on a mortgage payment, this type of insurance isn’t just applicable to first time home buyers, however. In fact, if the property in question is occupied by the owner, or is used as a second home and not as a rental property, it’s possible to purchase it with a down payment of less than 20% and have the insurance added to your mortgage. 

Who are the main providers of mortgage default insurance in Canada?

There are three major providers of this type of insurance, and they are:

  1. The Canada Mortgage and Housing Corporation (CMCH)
  2. Genworth Financial 
  3. Canada Guaranty

While CMCH is a crown corporation, numbers two and three are held privately, and insurance premiums are the same no matter who the provider may be. 

Will your rate be affected by the type of mortgage you have?

There are 3 main categories of mortgage, and each one will have an impact on the rate you receive. Let’s look at them each in turn:

Insured mortgages

If you’ve put down less than 20% for a down payment, your insurance premium loan-to-value (LTV) will be 80%, meaning your loan is higher than 80% of your purchase price.

Insurable mortgages

If you’ve put down more than 20% for a down payment and don’t need the insurance premium, your chosen lender can opt to pay the insurance premium at no cost to you, or, alternatively, you can pay the premium yourself to get a lower rate. This will depend entirely on the lender. Whichever option you plump for, you’ll get the best rates because your mortgage is insured. 

Uninsurable mortgages

These are if you’ve put down more than 20% for a down payment and don’t need an insurance premium, but don’t meet the insurers guidelines so can’t be bulk insured (as with an insurable mortgage). If you’re refinancing, you might fit this profile; if you’ve taken equity out of your house, made a purchase of more than a $1 million, have a 30-year amortization, or a single home rental, for example. 

Finding a better insurable rate

If you purchased your home before the 30th of November 2016, or had it refinanced, an experienced mortgage broker may be able to find you an insurable rate – insurable rates are typically lower than non-insured rates. 

To find out your chances of switching to a different lender to get a better insurable rate, reach out to a local financial advisor today. 

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