Mortgage Default Insurance
Mortgage default insurance is required when purchasing a home with a down payment of less than 20%. Mortgage default insurance plays an important role in helping Canadians buy a home — providing mortgages to buyers that otherwise might not qualify. It is meant to protect lenders in the event that a borrower defaults on their mortgage and therefore the lender is the beneficiary of the insurance policy, not the borrower.
Down Payment Requirements
Even with mortgage default insurance, the minimum down payment when purchasing a home is 5%. If you are purchasing a home between $500,000 and $999,999 you can put 5% down on the first $500,000, and 10% down on the remaining amount. If you are purchasing a property above $1,000,000, mortgage default insurance is not available and a 20% down payment is required.
Insured mortgages have a maximum amortization term of 25 years.
A mortgage insurance premium is charged on the amount of the borrowed funds. It is a one-time payment, which can be added to the principal amount of the mortgage. The premium will change depending on the loan-to-value ratio for the mortgage. The higher the percentage of the property value that is borrowed, the higher the percentage in insurance premiums that are charged.
Mortgage default insurance rates as they apply to a buyer’s down payment percentage are as follows:
Up to and including 80% Loan-to-Value: 2.40% Premium on Total Loan
Up to and including 85% Loan-to-Value: 2.80% Premium on Total Loan
Up to and including 90% Loan-to-Value: 3.10% Premium on Total Loan
Up to and including 95% Loan-to-Value: 4.00% Premium on Total Loan
In Ontario, mortgage default insurance is subject to PST (8%); the tax cannot be added to the loan amount and must be paid upon closing.
New Approval Requirements
As of July 1st, 2020, to be approved for coverage:
- All buyers will be limited to spending a maximum of 35% of their gross income on housing, and can only borrow a maximum of 42% of gross income once other loans are included.
- Buyers must not borrow money for their down payment.
- Buyers must have a credit score of 680.
There are three mortgage default insurance providers in Canada: the Canadian Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. The provider is chosen by your lender.
Ok, there you have it. Everything you need to know about mortgage default insurance. Thank you for taking the time to read this article. Feel free to get in touch with me if you are looking for a real estate agent or if you have any questions, I would love to help!