April 24, 2012

Mortgage Default Insurance vs. Mortgage Insurance

A couple of years ago my partner and I found out about a new condo project, that seemed like a great investment, in an “up and coming” central, downtown area. Part of the incentive was that if you were a first-time home buyer and put 5% down, another 5% was thrown in by the builder. We weren’t really ready to think about buying at that time but it did make me realize that there was a lot I didn’t know about mortgages and down payments. For example, is 5% the allowable minimum? And what are the pros and cons of making such a low down payment? Then I learned about mortgage default insurance.

First-time home buyers who make a down payment that is less than 20% must have mortgage default insurance and yes, loans can be up to 95% of the purchase price. Mortgage insurance allows lenders to offer competitive rates and of course, provides those with less cash the opportunity to buy a home. However, the insurance also takes the responsibility of the balance owing off the lender should you not be able to make payments.

There are three companies in Canada that provide such insurance: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.

The CMHC is owned by the government and offers mortgage insurance that covers the total balance owing. The CMHC website is a great resource for home buyers and home owners (planning to renovate). The site provides helpful planning calculators and a PDF downloadable list of CMHC approved lenders.

Genworth Financial Canada is the leading private provider of mortgage insurance and guarantees up to 90%. Their site offers helpful info for home buyers, including their A Better Way to Home Ownership Spring 2012 Guide and mortgage calculators.

Canada Guaranty also offers a list of products based on a minimum 5% down payment, however in most cases equity must come from personal finances or can be a gift from a relative but not builder or Realtor incentives.

The cost of the insurance premium is usually included in the mortgage payments, however the total can be paid up front. The amount depends on the percentage of how much the loan covers the cost of the home. Note that in Ontario and Quebec, provincial sales tax is added to the premium but sales tax cannot be added to the loan amount.

Mortgage default insurance differs from mortgage life insurance; an optional insurance that covers the balance in the event of untimely death.

For more information about Mortgages visit the Mortgages 101 fact sheet by the Financial Consumer Agency of Canada (FCAC).