Mortgage Default Insurance
WHAT IS MORTGAGE DEFAULT INSURANCE?
Mortgage default insurance is an insurance policy that covers the mortgage lender against a loss caused by non-payment of the mortgage by the borrower.
WHO BENEFITS FROM DEFAULT INSURANCE
It is important to understand that the insurance provides protection to the mortgage lending institution only and not to the homeowner. It does not include any payments or benefits not related to mortgage default insurance. It does not protect a borrower or the borrower’s interest in the property and is not the type of insurance that pays the mortgage payment if the borrower cannot pay it or dies.
CFF Centres do not receive any payments or benefits, including rebates, discounts, fees or commissions from the mortgage insurers. The benefit is for mortgage default instances only.
WHY IS MORTGAGE DEFAULT INSURANCE REQUIRED?
The Government of Canada allows banks to lend up to 80% of the value of the property (loan to value ratio) being mortgaged without requiring the mortgage to be insured by a mortgage default insurer. For this purpose, the value of the property is the lower of the purchase price or the appraised value. This type of mortgage is called a conventional mortgage.
A conventional mortgage requires a down payment of at least 20%. The down payment is that portion of the purchase price the borrowers furnish themselves. Conventional mortgages have the lowest carrying costs because they do not have to be insured against default.
When a borrower does not have a down payment of at least 20%, the mortgage must be insured by a mortgage default insurer. This type of mortgage is called a high ratio insured mortgage.
The Government of Canada requires that lenders obtain mortgage default insurance on high ratio insured mortgages to cover potential default of payment; as a result, their carrying costs are higher than a conventional mortgage because they include the insurance premium.
A bank may also ask for mortgage default insurance when the loan to value ratio is less than 80% and when there are unique risks such as a property in a remote location with limited or poor marketability or in a community supported by a single industry.
All mortgages must meet the bank’s lending qualifications and, high ratio insured mortgages must also meet the underwriting qualifications of the mortgage insurer.
WHO PROVIDES DEFAULT INSURANCE
Mortgage default insurance is provided by insurers such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, Canada Guaranty or another approved private insurer.
Each mortgage insurer has its own criteria for evaluating the borrower and the property, and it decides whether or not a mortgage can be insured. The bank, not the borrower, selects the mortgage insurer. It is possible that a mortgage application may be approved by a bank, but the application for insurance may be declined by a mortgage insurer.
WHO PAYS THE COST OF DEFAULT INSURANCE
If you require default insurance, CFF Centre will arrange for the purchase of mortgage default insurance at the time you take out your mortgage. The cost of the insurance is a one-time charge and may be paid at the time of closing or added to your mortgage balance. You will also be charged all applicable government sales taxes, which must be paid up front. The cost covers the life of the mortgage.
HOW IS THE COST OF DEFAULT INSURANCE DETERMINED?
The cost of default insurance is calculated by multiplying the amount of funds that are being borrowed by the default insurance premium, which typically varies between 0.5% and 6.0%. Premiums vary depending on the amortization period of your mortgage, the loan to value ratio, the size of your down payment and the product.
Property value: $250,000
Down payment: 5% or $12,500
Mortgage basic loan amount: $250,000 – $12,500 = $237,500
Amortization: 25 years
Loan-to-value ratio: 95% ($237,500/$250,000)
Premium amount: $237,500 x 2.75%
Default Insurance cost: $6,531.25
Total Mortgage Amount: $244,031.25 *
*If premium amount is added to the basic loan amount
Note: The premium amount may be subject to an additional charge for the additional years of amortization above the traditional 25-year mortgage amortization period.
Note: The cost of default insurance is subject to change if the purchase price or appraised value, the amount of down payment or the amortization changes. The final premium and the cost of your mortgage default insurance will be disclosed in your mortgage commitment/loan document.