MORTGAGE DEFAULT INSURANCE
For down payments under 20%.
In Canada, when you buy a property with a down payment of less than 20% of the purchase price, that mortgage must be insured with mortgage default insurance.
For something that is so common, there are many misconceptions about who provides mortgage default insurance, what mortgage default insurance is, and even who the beneficiaries are. We have the answers for you.
There are three default insurance providers in Canada: the Canadian Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), and Canada Guaranty.
CMHC is backed by the Canadian government and often sets the tone and policy for the other two private insurers. Almost every lender will use CMHC to insure their loans, and some will use one, or both, of Canada Guaranty and Genworth as well.
The advantage to having three insurers to choose from is that while they are similar in a lot of ways, there are some key differences in policy that can mean the difference between getting a mortgage application approved or not. Moreover, your broker may choose a particular lender because that lender will use the insurer whose policy makes the deal work.
The purpose of mortgage default insurance is right in the name; it’s an insurance policy that protects against the borrower defaulting on the loan, which also happens to be why mortgage default insurance is required for high ratio (less than 20% down payment) mortgages.
In such cases, the risk taken on by the lender is greater, hence the insurance requirement. This leads us to the fact that people usually find the most surprising; default insurance is not for the benefit of the borrower, but for the lender!
What makes this confusing is the fact that in the case of high ratio loans, the lender passes the cost of the insurance on to the borrower by including it in the mortgage amount.
However, in the case of the borrower defaulting, the insurance policy would pay the lender back the amount of the loan. Thus it, and not the borrower, is the beneficiary of the insurance.
Many lenders will insure mortgages that are not high ratio in order to make them lower risk, and so that they may be sold more easily to investors. However, in those cases, the cost of the premium is absorbed by the lender.
There are other kinds of insurance that you may encounter when it comes to mortgages besides mortgage default insurance.
Most lenders require that the borrower has fire insurance on their property, with the lender shown as beneficiary. This will usually be listed as a condition in the mortgage contract itself.
You also may be offered mortgage life and disability insurance. These policies benefit the borrower.
Life insurance will pay out the balance of the mortgage should the borrower pass away, while disability insurance will make his or her mortgage payments in the case where working becomes impossible due to disability.
Policies vary by provider, but the most important thing to watch out for with this is portability.
Policies offered directly from the lender are typically tied to that lender, meaning if you refinance with someone else the policy cannot be taken with you – it is not portable. Most policies sold through mortgage brokers are fully portable, but this is still something you should ask about. Mortgage life or disability insurance is not required as a condition of getting approved for a mortgage.
When it comes to mortgage default insurance, the lender handles the entire application process, working from the documentation provided by your mortgage broker and your realtor, so it’s no wonder that most borrowers don’t have a clear idea of what it actually is.
However, it’s an essential part of buying a home, particularly for first-time home buyers who don’t typically have more than 20% to put down.
This is another instance where having a mortgage broker on your side can really help you sort through all the information and help you fully understand the home buying process from start to finish.