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In Canada, home buyers are required to get mortgage default insurance if they pay a down payment that is lower than 20% of the cost of the home. This type of insurance serves to protect the lenders in case the buyer defaults on their loan mortgage payments.
What to Expect in Terms of Cost
The cost of mortgage default insurance is around 3% to 4% of the amount of the mortgage. This type of insurance makes it possible for anyone to be able to buy a home in Canada. Without it, some people may not have the opportunity to purchase a property.
The mortgage default insurance empowers lenders to lower the rates of the home mortgage loans. This is based on the fact that the risk of defaulting on the payments is absorbed by the loan issuer.
How to Estimate the Premium via a Mortgage Default Insurance Calculator
To estimate the premium you need to pay, you can use a calculator designed specifically for mortgage default insurance. It will allow you to know how much you will need to pay for the insurance based on the amount of your mortgage.
In calculating it, you must include the list price of the home that you wish to buy along with the amount that you have set aside for your down payment. With these data, the calculator can estimate how much you need to pay for the premium.
Where to Get Mortgage Default Insurance
In Canada, there are three companies that offer mortgage default insurance: Canada Guaranty, Sagen (formerly Genworth Canada), and Canada Mortgage and Housing Corporation (CMHC). You can review each one and decide where to get your mortgage default insurance from.
Be Aware of the Stipulations
It is important to know that not everyone in Canada is qualified to get mortgage default insurance. There are some stipulations that have been set in place that you as the home buyer must fulfill before you can have access to it.
To qualify for this type of insurance, you must have a maximum of 25 years to pay the amortization of your home mortgage. If the home you’re interested in buying is in the range of $500,000 to $999,999, it will be necessary for you to provide a down payment of more than 5%.
The least amount that you can pay as a down payment is 5% for the first $500,000 and then there is an additional 10% on the excess. Mortgage default insurance is not available for homes costing one million dollars and above. In such a case, you will need to provide a down payment of 20%.
More Stipulations That You Should Know
In addition to the stipulations mentioned above, more were implemented starting July 1, 2020. These additional stipulations were set in place due to the Canadian economy experiencing a downward spiral. For borrowers to be eligible for mortgage default insurance, the ratio of their gross debt service must be lower than 35, and their total debt service must be lower than 42.
Furthermore, borrowers must possess a minimum credit score of 680. It is prohibited for borrowers to get a loan to pay the down payment for their home. They are permitted to borrow money for a mortgage, but they must have the cash for the down payment.
Same Rates and Other Financial Considerations
You can expect to get the same rates from the three firms that offer mortgage default insurance. It means that Canada Guaranty, Sagen, and CMHC have the same mortgage default insurance rates.
For those who reside in Saskatchewan, Ontario, Quebec, and Manitoba, it is important to realize that premiums have provincial sales tax added to them. This tax cannot be combined with the loan of your mortgage. This is why you will be required to pay cash for the sales tax immediately upon receiving your coverage for mortgage default insurance.
How to Calculate the Premium for Your Mortgage Default Insurance
For calculating the premium of your mortgage default insurance, let’s take an example of a house costing $300,000, with a down payment of $40,000. The amortization period is 25 years.
The down payment is calculated as being part of the cost of the house. Given that the purchase cost is $300,000, the down payment turns out to be 13.33%. Then, you need to figure out the amount of the loan of the mortgage, which will be based on $260,000, which is the balance of the purchase cost less the down payment.
You can calculate your insurance premium by getting 3.1% of the balance, which is the amount of the mortgage loan. Thus, given the figures above, your insurance premium for a $300,000 home less the down payment of $40,000 will be $8060.
What to Do When You Want to Reduce the Cost of Your Mortgage Default Insurance
It is certainly understandable if you want to pay the lowest amount possible in regard to your mortgage default insurance. To do that, you have two options to choose from: you can make a larger down payment or you can buy a cheaper home.
There are some ways to increase your down payment. If it is the first time you buy a new home, you are allowed to make a withdrawal from your RRSP, which is tax-free. You can also find other sources of funds; a gift from a family member, for example, will be acceptable.
Before thinking of getting a loan to pay a bigger down payment, remember the new stipulations implemented in July 2020. You will not be able to get mortgage default insurance if you rely on borrowing money to make your down payment. On the other hand, if you do borrow money, and this allows you to make a down payment of 20% or more, you will not even require any kind of mortgage default insurance.
Regarding Payments for the Mortgage Default Insurance
How will you make payments for your mortgage default insurance? Well, the insurance is combined with your mortgage payments. Thus, you will take out a loan for the cost of the insurance as well as the cost of the mortgage.
Unlike closing costs, including land transfer taxes and legal fees that require cash payments immediately, there is no requirement for the mortgage default insurance to be paid upfront in cash when you buy a home.
Therefore, you will pay the insurance on a monthly basis together with your mortgage. Your mortgage and this insurance will equate to one payment that you make each month.