Homeownership is a major life goal for many Canadians. But with rising property prices and stringent lending criteria, many find themselves borrowing a significant amount to buy their dream home. This is where mortgage insurance enters the picture. But what is it exactly? And do you really need it?
1. What is Mortgage Insurance?
Mortgage insurance, often referred to as mortgage default insurance or CMHC insurance (after the Canada Mortgage and Housing Corporation, one of its primary providers), is designed to protect lenders in case a borrower defaults on their loan. If a borrower is unable to make mortgage payments and the lender is unable to recover their costs from selling the property, the insurance will cover the lender’s losses.
2. Is It Mandatory?
In Canada, mortgage insurance is required by law if your down payment is less than 20% of the purchase price of the home. This means, if you’re putting down less than 20%, you’re legally obligated to purchase mortgage insurance. This is mainly because lower down payments are perceived by lenders as higher risk.
3. How Does It Benefit Borrowers?
While the primary objective of mortgage insurance is to protect lenders, borrowers also benefit indirectly:
- Higher Borrowing Capacity: Without mortgage insurance, lenders would be less willing to grant loans with small down payments. With it, borrowers can buy a home with as little as 5% down.
- Competitive Interest Rates: As the risk to lenders is lowered with insured mortgages, borrowers often get to enjoy more competitive interest rates.
4. Costs Involved
The premium for mortgage insurance is calculated as a percentage of the loan amount, and it’s based on the size of your down payment. The smaller the down payment, the higher the premium percentage. These premiums can be paid in a lump sum, but most often, they’re added to the mortgage amount and paid off over the life of the loan.
5. Main Providers in Canada
While CMHC is the most widely recognized mortgage insurance provider in Canada, there are others, including Genworth Financial and Canada Guaranty. Each provider might have slightly different policies, but the core offering remains consistent due to federal regulations.
6. Difference Between Mortgage Insurance and Mortgage Life Insurance
It’s crucial to differentiate between mortgage default insurance and mortgage life insurance. The latter is a life insurance product designed to pay off the remaining balance of your mortgage if you pass away, ensuring that your loved ones aren’t burdened by mortgage payments. It’s an optional product, unlike mortgage default insurance.
7. The Debate on its Necessity
Given that mortgage insurance protects lenders, some argue against its usefulness for borrowers, especially since it adds to the cost of a home purchase. However, without such insurance, the reality is that lenders would be far more reluctant to offer high-ratio mortgages. This would make homeownership an elusive dream for many Canadians.
Mortgage insurance in Canada serves as a safeguard for lenders, ensuring that they can lend money even to those with smaller down payments. While it does come at a cost, it plays a pivotal role in making homeownership accessible to a broader segment of the population. Before buying, ensure you understand the ins and outs of mortgage insurance, how it applies to your situation, and how it will impact your mortgage payments.
8. How to Cancel Mortgage Insurance
Once you’ve acquired mortgage insurance, it doesn’t mean you’re stuck with it for the entire life of your mortgage. Here’s what you need to know about discontinuing it:
- Reach 20% Equity: When your mortgage balance drops to 80% of the original home value, you can approach your lender about cancelling the insurance. However, it’s worth noting that this applies mainly to privately sourced insurance, not necessarily those through CMHC.
- Property Value Increases: If property values in your area surge and your home’s value increases significantly, it could push your equity above 20%. In such cases, you may want to consider getting a property valuation. If the increased property value brings your loan-to-value ratio below 80%, you might be eligible to cancel your mortgage insurance.
9. Refinancing as an Option
If you’re contemplating refinancing your home, it could be an opportune time to reassess the need for mortgage insurance. With an increased home equity or better financial stability, you might be able to negotiate better terms with your lender, which might include the removal of mortgage insurance.
10. The Impact of Market Dynamics
Canada’s housing market is subject to fluctuations. In a declining market, even if you’ve paid down your mortgage below the 80% threshold, lenders might still deem it risky to remove mortgage insurance. It’s always important to be aware of broader market trends when considering changes to your mortgage setup.
11. Future of Mortgage Insurance
The discourse around mortgage insurance is ongoing. As the Canadian housing landscape evolves and as policy-makers continually assess housing affordability, there might be future changes to regulations surrounding mortgage insurance. Staying informed and being proactive in understanding these changes will be crucial for homeowners.
Conclusion
Mortgage insurance, while primarily serving as a protection mechanism for lenders, undoubtedly plays a role in facilitating homeownership for many Canadians, especially those who might not have large sums saved for a down payment. However, like every financial commitment, it’s essential to understand its intricacies, benefits, and potential drawbacks.
