Everything you need to know about mortgage loan insurance
• What is a Mortgage Loan Insurance?
Mortgage loan insurance is a type of insurance that is required by lenders when a homebuyer puts down less than 20% of the purchase price. This insurance helps protect the lender against mortgage default and allows consumers to purchase a home with a minimum down payment of 5%. The interest rates for these loans are comparable to those offered with a larger down payment. In order to obtain this insurance, the lender pays an insurance premium, which is typically passed on to the consumer. The premium is based on the loan-to-value ratio, and can be paid in a single lump sum or added to the monthly mortgage payments.
Mortgage loan insurance is designed to protect lenders while allowing buyers to purchase property with a small down payment. If a buyer is unable to provide 20% or more of the property's price as a down payment, the lender can require the loan to be insured by a third party. This insurance provides a safety net for the lender, allowing them to recover the money they lent in the event that the borrower defaults on their payments. By mitigating some of the risks associated with mortgage lending, this insurance helps make it possible for more people to purchase homes.
• What is Loan-to-Value ratio (LTV)?
The loan-to-value ratio is the ratio of the mortgage loan amount to the value of the property being purchased. For example, if a home is being purchased for $500,000 and the mortgage amount is $400,000, the loan-to-value ratio is 80% ($400,000 divided by $500,000).
The loan-to-value ratio is an important factor in determining the cost of mortgage loan insurance. As the loan-to-value ratio increases, the risk to the lender also increases, and therefore the cost of the insurance premium also increases.
• Who offers mortgage loan insurance?
In Canada, mortgage loan insurance is offered by three providers: the Canada Mortgage and Housing Corporation (CMHC), Sagen (previously Genworth Financial Canada), and Canada Guaranty Mortgage Insurance Company. The CMHC is a government-owned corporation that provides mortgage loan insurance to Canadian homebuyers, while Genworth Financial Canada and Canada Guaranty are private companies that offer similar insurance products.
• What is the cost of a mortgage loan insurance?
The cost of mortgage loan insurance in Canada depends on several factors, including the amount of the mortgage, the size of the down payment, and the amortization period. Generally, the premium for mortgage loan insurance is calculated as a percentage of the mortgage amount and ranges from 0.6% to 4%-4.50% of the total mortgage amount depending on provider chosen. The premium may be paid as a lump sum at the time of closing or added to the regular mortgage payments.
It's important to note that mortgage loan insurance premiums increase as the size of the down payment decreases, and premiums may also be affected by the type of mortgage and the lender's requirements. Borrowers should consult with their lender or mortgage broker to obtain specific information on mortgage loan insurance premiums.
When applying for a mortgage, the exact premium charged by the lender will be calculated. The table below can give you an example estimate of the premium with CMHC . Additionally, there may be provincial sales tax applicable.
Down Payment | Loan-to-Value (LTV) | Premium on Total Loan |
|---|---|---|
| 35% or more | 65% or less | 0.60% |
| 25% to 34.99% | 65.01% to 75% | 1.70% |
| 20% to 24.99% | 75.01% to 80% | 2.40% |
| 15% to 19.99% | 80.01% to 85% | 2.80% |
| 10% to 14.99% | 85.01% to 90% | 3.10% |
| 5% to 9.99% | 90.01% to 95% | 4.00% |
• How does it impact your mortgage loan insurance if you sell or buy a new property?
If you sell your property, your mortgage loan insurance policy will be cancelled and any refund owed to you will be sent to your mortgage lender. You will not be able to transfer the policy to a new property.
If you are buying a new property and have an existing mortgage loan insurance policy, you may be able to port your policy to your new mortgage. This means that you can keep your existing mortgage loan insurance policy and transfer it to your new property, as long as you meet certain eligibility requirements.
It's important to note that not all mortgage loan insurance policies are portable, and even if your policy is portable, you will still need to meet the lender's qualification criteria for the new property.
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