Mortgage default insurance is a mandatory requirement in Canada for mortgages with a down payment of less than 20%. It serves to protect lenders from financial losses in the event of borrower defaults. Understanding the basics of mortgage default insurance is crucial for prospective homebuyers working with their bank or a Calgary Mortgage Broker in Canada. In this article, we will explore the key aspects of mortgage default insurance, including eligibility requirements, premium rates, and its impact on the overall cost of borrowing.

Eligibility Requirements

To be eligible for mortgage default insurance, borrowers typically need to meet certain criteria, including:

1. Credit Score: A minimum credit score of 600 is usually required.
2. Maximum Purchase Price: There is a maximum purchase price limit, often set at $1 million.
3. Down Payment: The minimum down payment for a home in Canada is 5% of the purchase price.

Primary Providers and Alternatives

The primary provider of mortgage default insurance in Canada is the Canada Mortgage and Housing Corporation (CMHC). However, there are also private alternatives available, such as Canada Guaranty and Sagen (formerly Genworth). These insurers offer similar coverage and eligibility requirements, providing borrowers with options when securing mortgage default insurance.

Premium Rates and Loan-to-Value Ratio

Premium rates for mortgage default insurance vary based on the loan-to-value ratio (LTV), which represents the percentage of the home’s value that is financed through the mortgage. The premium rates can range from 0.60% to 4.00% of the total loan amount. Higher LTV ratios typically result in higher premium rates.

Here are the standard premiums at all three insurers:

Sagen and Canada Guaranty Offerings

Sagen and Canada Guaranty are private insurers that offer additional options for mortgage default insurance:

1. Sagen: Sagen provides insurance for new to Canada, self-employed mortgages, second mortgages, investment properties, and mortgages with a borrowed down payment.
2. Canada Guaranty: Canada Guaranty offers insurance for new to Canada, conventional mortgages, rental property mortgages, second mortgages, and other mortgage types.

Considerations and Drawbacks

While mortgage default insurance allows borrowers to secure a mortgage with a smaller down payment, there are some considerations and drawbacks to be aware of:

1. Non-Refundable Premiums: Mortgage default insurance premiums are non-refundable, representing an upfront cost for borrowers.
2. Premiums and Interest Costs: Adding the premium to the mortgage balance means paying mortgage interest on the premium for the duration of the mortgage.
3. Cost of Insurance: The main disadvantage of mortgage default insurance is the cost of insurance premiums, which can vary based on the loan-to-value ratio and mortgage type.

Making Informed Decisions

When considering mortgage default insurance, borrowers should carefully evaluate the costs and weigh them against the benefits. It may be more financially advantageous to make a larger down payment to avoid the insurance premiums altogether. Consulting with a mortgage professional can provide valuable guidance in navigating the mortgage default insurance process and making informed decisions regarding homeownership.

Mortgage default insurance is a requirement for mortgages in Canada with less than a 20% down payment. It is designed to protect lenders from financial losses in the event of borrower defaults. Understanding the eligibility requirements, premium rates, and potential impact on the overall cost of borrowing is essential for prospective homebuyers. By considering the available options and evaluating the costs, borrowers can make informed decisions when it comes to mortgage default insurance.