What is Mortgage Insurance? 7 Common Questions Answered

You’re looking to purchase a home and you’ve heard that you’ll need mortgage insurance. While Canadians often pay for this service, many don’t understand what it is. We’ll bring you up to speed by answering seven common questions about mortgage insurance. 

Do I Need Mortgage Insurance?

If you’re a Canadian utilizing a mortgage to buy a home and you’re unable (or unwilling) to make a 20% down payment, then yes, you need mortgage insurance. 

Why Do I Need Mortgage Insurance?

Mortgage insurance is put in place to protect the lender against the possibility of you defaulting on your mortgage. 

Simply put, if a homebuyer defaults on their mortgage, lenders look to recoup their money by selling the home. On homes where the mortgage total is significantly less than the total purchase price, lenders find themselves in a safe position. In cases where the mortgage total is nearly as great as the purchase price, lenders run the risk of being unable to recoup their funding. For this reason, mortgage insurance is mandatory on all purchases where the down payment is less than 20%. 

• Of note: the minimum down payment on home purchases in Canada is 5% on homes under $500K. Homes purchased for more than $500K will require down payments equal to 5% of the first $500K, and 10% of the remainder. Homes over $1M require 20% of the entire purchase price. 

How Does Mortgage Insurance Help Me?

Mortgage insurance makes it possible for you to buy a home. Most of us are not walking around with 20% of the value of a home in our jeans pockets. In a world without mortgage insurance, lenders may be simply unwilling to deal with the average hopeful homebuyer.

Which Mortgage Insurance Companies Operate in Canada?

There are three mortgage insurance companies serving the Canadian market. They are CMHC (Canadian Mortgage Housing Corporation), Sagen (formerly known as Genworth), and Canada Guaranty. 

Is Mortgage Insurance the Same as Home Insurance? Mortgage Creditor Insurance?

No, these are three different things. As discussed, mortgage insurance protects the lender from the possibility of the home buyer defaulting. Home insurance protects the homeowner against such things as fires, flood, and theft. Mortgage creditor insurance is personal life and disability insurance connected with your mortgage. Pinsky Mortgages is happy to provide you with additional information on the various types of insurances related to mortgages and homes. 

How Much Does Mortgage Insurance Cost?

While rates can vary, it’s typical that mortgage insurance will cost approximately 4% of the amount of your mortgage. This cost will be added up front and folded into the amount of your mortgage. 

Let’s consider the following example: 

You purchase a home for $500K, and make a down payment of 5% ($25K). The amount owing in this case is $475K.  

4% of that amount is $23,750, which is added to your mortgage, bringing the total to $498,750. 

If you quickly choose to resell your home and do so for the same $500K price you paid for it, you’ll be left with a mere $1250. This amount will not even suffice to cover your closing costs. Your down payment has essentially vanished. 

How Does Mortgage Insurance Protect the Value of Canadian Homes

Some home buyers see mortgage insurance as a penalty they incur for failing to make a 20% down payment. While it does indeed protect the lender, it also protects Canadian homeowners collectively. 

Canada’s mortgage insurance system reduces the likelihood that the Canadian housing market will crash in a manner similar to that experienced in the United States in 2008. 

In that instance, lenders found themselves in a situation where defaults were piling up and mortgage insurers were unable to protect them. As a result, lenders were forced to sell a high number of homes in a short timeframe, causing home values to plummet. This was bad news not only for lenders and those unable to make their mortgage payments, but for all homeowners who found their investments devalued. 

Unlike US mortgage insurance providers, Canadian companies are paid their full premiums upfront, and they are also better funded. This protects the Canadian marketplace from a sudden crash. 

Pinsky Mortgages Can Help

If you find yourself with additional questions pertaining to mortgage insurance or any other aspect of the home purchasing process, Pinsky Mortgages is here to help. Our team values education and believes that decisions of this magnitude should be well-informed.

Ask us a question today, or set up your free mortgage consultation.