What You Need to Know About Mortgage Default Insurance.
If you are a first-time home buyer, your probably wondering what mortgage default insurance is and why they require borrowers to have it. You may already know if your purchasing a home with less than 20% down payment your lender will require you to apply for mortgage default insurance. The insurance then has premiums for which the borrower will have to pay. Why is it required? Here is an explanation of what mortgage default insurance is and what you need to know about it as a first-time home buyer.
Mortgage Default Insurance: It is an insurance policy that compensates a mortgage lender for losses due to the default of a mortgage.
In other words, mortgage default insurance protects the banks only and not the borrower or the borrower’s interest in the property. It is mandatory for any purchase with a down payment between 5% and 19.99%. Mortgage default insurance was put in place to encourage banks to lend to borrowers who may have minimal down payment to purchase a home.
There are three providers of mortgage default insurance in Canada. The most known insurer is CMHC, the other two mortgage default insurers in Canada are Genworth Financial and Canada Guaranty.
Without the mortgage insurers in place mortgage rates would be much higher for those with down payments of less than 20%. Lenders are willing to take a chance because the risk of default now falls on the lap of the mortgage insurers.
How do you qualify for mortgage default insurance?
Like qualifying for a mortgage there are requirements that must be met when applying for mortgage default insurance. Each insurer also has different requirements. CMHC requirements differs from Genworth Financial and Canada Guaranty. Speak with your WISE mortgage agent to which one requirement applies to you.
The requirements may include maximum amortization of 25 years. Your down payment must be minimum 5% for the first $500,000. If the purchase price falls between $500,000 – $999,999 a higher down payment is required. The minimum down payment must then be 5% of the first $500,000, and 10% of the remaining amount.
For homes priced $1 million or higher mortgage default insurance is not offered. In this case buyers will need a minimum of 20% down payment.
There are a few other requirements that are directed at the borrower’s debt service ratios. July 1st, 2020 mortgage default insurer CMHC changed their rules due to the economic downturn caused by the pandemic. The rule changes were:
- Gross Debt Service ratio less than 35%
- Total Debt Service ratio less than 42%
- Have a credit score of at least 680
- Non borrowed down payments
The other two insurers; Genworth Financial and Canada Guaranty, however, did not change their requirements. For clarification speak with your WISE mortgage agent to help you figure out what is required of you.
How much does it cost and how do you pay?
Then lender is charged an insurance premium by the mortgage default insurance company. The Your lender pays an insurance premium on mortgage loan insurance. It is then calculated as a percentage of the mortgage and based on the size of the borrowers down payment. The lender then passes this payment on to you, for which you have one of two choices. You can pay it in a lump sum or add it to your mortgage and include it in your payments.
If you choose to add the premium to your mortgage payments, you will be required to pay it off throughout the life of your mortgage loan. You must however keep in mind that you will also be required to pay provincial sales tax on your insurance premiums; depending on the province you live in. PST cannot be added to your mortgage, so you will need to pay upfront on closing.
In the end mortgage default insurance is not for the borrower. So, you may be wondering where the benefits for the borrower exist. Well any mortgage with less than 20 % down payment is viewed by all lender as a high-risk mortgage. CMHC, Genworth Financial and Canada Guaranty allows lenders to be comfortable lending their money to these applicants. It allows borrowers to obtain a mortgage for up to 95% of the purchase price of the home with favorable rates and minimal down payment.
If you are a first time home buyer you should familiarize your self with mortgage default insurance so that you are prepared and there will be no surprises when you decided to enter the market. Talk to your Wise mortgage agent today. Download and Enjoy our Free E-BOOK for first time home buyers. Gain some insight and prepare yourself before taking the leap in home ownership.
A Guide to Buying Your First Home
Buying your first home may be easier than you think.