Buying a home is one of the biggest financial commitments most of us will ever make. For many buyers, especially first-time buyers, a mortgage is necessary to get a home. But if a buyer can’t come up with a down payment of at least 20% of the purchase price, they will likely need to buy mortgage insurance.
This insurance is designed to protect lenders in case a borrower defaults on their mortgage payments. It doesn’t provide direct financial protection to the homeowner, but it allows buyers to get financing with a lower down payment, making homeownership more possible.
In Canada, government-backed loan protection is often required for high-ratio mortgages, which are mortgages where the buyer’s down payment is less than 20%.
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How It Works and Why It’s Required?
Mortgage insurance is required for homebuyers who can’t put down 20% of their home purchase price. In these cases, lenders are more at risk as borrowers with smaller down payments are more likely to default on their loans. To mitigate this risk, lenders require default insurance if the borrower misses a mortgage payment or forecloses.
Important to note that this insurance protects the lender, not the homeowner. If a borrower defaults on their loan, the insurer will pay out the outstanding mortgage balance to the lender. The homeowner is still responsible for their payments and must continue to make them as agreed.
In Canada, government-backed loan protection is typically required for high-ratio mortgages—those where the buyer contributes less than 20% of the total purchase price. The cost of this insurance is added to the mortgage and paid as part of the homeowner’s monthly payments.
These mortgage insurances help people secure loans with lower upfront payments while still giving lenders the security they need to approve riskier loans. At Buckler Insurance, we assist our clients in navigating these terms so they understand both their responsibilities and any alternatives available.
Types of Mortgage Insurance in Canada
There are three main types of insurance available to homebuyers in Canada, each serving a different purpose:
- CMHC Mortgage Loan Insurance: This type of insurance is required for high-ratio mortgages where the down payment is less than 20%. Offered by CMHC, this insurance enables homebuyers to secure financing with a smaller down payment by reducing the lender’s risk. The premium is based on the mortgage amount and is typically added to the monthly payments.
- Mortgage Protection Insurance: Unlike CMHC mortgage insurance, which protects lenders, mortgage protection is designed to protect the borrower. This coverage ensures that mortgage payments continue in case of unexpected events such as death, disability, or job loss. This optional coverage provides peace of mind to homeowners by ensuring their mortgage obligations are met even in difficult financial circumstances.
- Lender-Required Private Mortgage Insurance: Some lenders may require private mortgage insurance as an alternative to CMHC coverage. This type of insurance is typically required for high-risk borrowers or unconventional mortgage arrangements.
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How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance varies based on several factors, with the primary determinant being the size of the down payment. The lower the down payment, the higher the premium. These premiums are calculated as a percentage of the mortgage loan and are typically added to the borrower’s mortgage payments.
Premium Rates Based on Down Payment Percentage:
- 5% down payment: Highest insurance premium, as the loan carries more risk.
- 10% down payment: Moderate premium, slightly lower than for 5% down.
- 15% down payment: Lower premium, as more equity reduces lender risk.
- 20% or more down payment: No coverage is required.
For example, if a homebuyer purchases a property for $500,000 with a 10% down payment ($50,000), they will need to finance $450,000. If the insurance premium rate is 3.10%, the insurance cost will be $13,950, which is typically rolled into the total mortgage amount.
Monthly Payment Considerations
Adding this type of protection increases the total borrowed amount, which also raises monthly payments. While this does add to the overall cost of owning a home, it allows buyers to enter the market with a smaller initial investment.
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Mortgage Insurance vs. Life Insurance: What’s the Difference?
Many homeowners think that mortgage insurance is the same as life insurance, but they serve two very different purposes.
- Mortgage Insurance Protects the Lender: It pays your lender if you fall behind on payments. It protects their financial interest.
- Life Insurance Benefits the Homeowner’s Family: A life insurance policy pays out to the policyholder’s beneficiaries, who can then use the funds as they see fit, including paying off a mortgage.
- Flexibility and Payout Differences: Life insurance has more flexibility as the payout is not tied to a specific debt. Homeowners may prefer this option if they want their family to have financial choices beyond just paying off the mortgage.
Some homeowners choose life insurance over mortgage insurence, because it provides more financial protection. At Buckler Insurance, we can help you compare options to determine what’s best for you.
Do You Need Mortgage Insurance?
Buyers who offer less than 20% of a home’s value as a down payment will need some form of mortgage coverage to qualify for a loan. But in other cases, it may still be beneficial, depending on personal goals.
- Financial Stability: Do you want to avoid the added cost by making a larger down payment?
- Risk Tolerance: Would you prefer additional protection in case of unexpected financial hardship?
- Long-Term Goals: Do you plan to stay in the home long enough to benefit from paying the insurance premium?
Protect Your Home & Financial Future
Understanding mortgage insurance is an essential part of the home-buying process. Whether required or optional, having the right coverage can make a significant difference in protecting your financial future.
At Buckler Insurance, we provide expert guidance to help homeowners explore their insurance choices and find the best protection for their needs. Reach out to us today for personalized advice on mortgage and home protection options.
