Insured Mortgage
An insured mortgage protects lenders in the event that borrowers don't meet down payment requirements (20% or more) for a 'conventional mortgage'.
A mortgage with less than a 20% down payment is an insured mortgage - an insured mortgage helps mitigate any loss lenders may face during potential foreclosure.
Insured Mortgage Overview
When you apply for a mortgage, your lender will take many factors into consideration to determine what level of risk you are as a borrower, including whether your require your mortgage to be insured.
What does this mean?
Simply put, lenders want to ensure you’ll be capable of making your mortgage payments (consistently) on time.
The federal government, along with lenders, have protocols set in place to reduce the risk of lending.
To mitigate risk, borrowers with less than a 20% down payment on the purchase price of their home are required to buy mortgage default insurance.
A 20% minimum down payment on a $500,000 home = $100,000 (plus closing costs), which is often a stretch to save up for; mortgage insurance helps borrowers enter the housing market quicker be allowing them to provide less than a 20% down payment.
Does Mortgage Insurance Only Protect The Lender?
No!
While mortgage insurance greatly protects the lender, it is also partly there to serve YOU, the borrower.
Putting less than a 20% down payment is considered higher risk, but with the added benefit of mortgage default insurance, the risk bared upon the lender decreases.
How does this affect YOU?
Rather than being stuck with higher interest rates due to a small down payment, mortgage insurance may open you up to more flexible mortgage plans with competitive interest rates.
Psst: It also allows you to enter the housing market quicker because it lowers your minimum required down payment.
Hurray!
Are There Regulations For Mortgage Insurance?
You bet!
Mortgage insurance can be purchased for a mortgage with a minimum 5% down payment (or 95% loan-to-value [LTV] of the purchase price of a home).
The regulations are as follows:
- Purchase Price: $500K or LESS
- Minimum Down Payment: 5% of purchase price
- Mortgage Insurance: REQUIRED
- Purchase Price: $500K - $999,999
- Minimum Down Payment: 5% up to a $500K purchase price 10% from the difference between $500K to $999,999 of purchase price*
- Mortgage Insurance: REQUIRED
- Purchase Price: $1 Million or MORE
- Minimum Down Payment: 20% of purchase price 10% from the difference between $500K to $999,999 of purchase price*
- Mortgage Insurance: Not Required (uninsured conventional mortgage)
*For the purchase price of a $650,000 home, the minimum down payment calculation for an insured mortgage would be as follows:
Step 1: $500,000 x 5% = $25,000
Step 2: $150,000 x 10% = $15,000
Step 3: $25,000 + $15,000 = $40,000
The minimum down payment required would be $40,000, and the mortgage would be insured.
NOTE: some lenders may require mortgage default insurance on mortgages with a down payment of over 20% for borrowers who are self-employed or have bad credit.
Why Is Mortgage Insurance Required?
When a lender provides security for a mortgage, they are taking a calculated risk on your ability to pay them back (based off their assessment of your credit history, credit score, employment status etc.)
We all know that life can unexpectedly take a turn for the worse; even though a lender may have trusted that you would make payments on time, you may find yourself in a situation where you are unable to.
If mortgage payments aren’t made on time and you default on your loan, the lender will often have to recoup their costs by foreclosing on your property.
Not ideal!
How Does Mortgage Insurance Protect Lenders?
If there is a significant principal balance owing on a property, or the market has shifted and a property has significantly depreciated in value during foreclosure, lenders may be at risk for losing money.
In order to not LOSE money on a foreclosure, mortgage default insurance protects lenders in this situation.
In the unfortunate situation where a borrower loses their home due to missed payments, the lender receives compensation for any shortage of funds they receive with the foreclosure.
This allows them to operate efficiently so that they can continue to provide mortgages to those in need without running the risk of constantly losing money.
NOTE: If you’re at risk for losing your home or are struggling to make payments on time, checkout our tips for credit 101 or give us a (no-risk) phone call to discuss debt consolidation options such as a Home Equity Line of Credit (HELOC).
As a licensed mortgage broker, I'm here to help and offer informed, judgement free advice!
Who Provides Mortgage Default Insurance
Mortgage insurance can be obtained through one of three main providers in Canada:
- CMHC (Canadian Mortgage and Housing Corporation)
- Canada Guaranty
- Sagen (previously ‘Genworth’)
- Canada Guaranty
Mortgage Default Insurance Premiums
Depending on whether you have an insured mortgage or a conventional mortgage, the burden to pay for mortgage default insurance may fall on you, or in some cases the lender.
Insured Mortgage (High LTV Ratio)
- A one-time premium is calculated based off your provided down payment size. Typically, the higher your down payment, the lower your mortgage insurance premium will be
- The mortgage insurance premium is often factored into the amount of your mortgage
- Interested in determining how to save the most money on your mortgage default insurance? Feel free to give us (your licensed mortgage brokers) a shout!
- The mortgage insurance premium is often factored into the amount of your mortgage
- A premium that is often paid by the lender on mortgages with an LTV of LESS than 80%
- Protects the lenders in the case of default, borrowers are often unaware that it was even purchased
- Many Monoline Lenders use this premium to protect themselves, which also allows them to offer more competitive rates
- Protects the lenders in the case of default, borrowers are often unaware that it was even purchased
Your Resource Insured Mortgage Info
Mortgage default insurance works to benefit both the lender and the borrower.
An insured mortgage allows the borrower incentives and flexibility for their borrowing needs, while simultaneously protecting the lender on the risks they incur for offering high ratio mortgages.
If your down payment is less than 20%, you will be federally required to obtain mortgage insurance, regardless of your credit score and income.
The good news is, I'm here to help make things easy!
I’m Kyle Benzies (licensed mortgage broker), and I’d love to have a confidential chat with you regarding your mortgage goals. If an insured mortgage is on the horizon, I'd be happy to help answer questions about it.
To discuss an insured mortgage and other mortgage solutions, give me a no-risk phone call!
***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***