What is Mortgage Default Insurance??

By: Elixir Real Estate Inc

What is Mortgage Default Insurance??

Tags: Mortgage Default Insurance, High-Ratio Mortgages, Home Equity

What exactly is Mortgage Default Insurance, and when and why it is required to secure a mortgage here in Canada? How the premium is calculated and what happens on default. 

As per law, Canadian banks can only provide mortgage ability to consumers with at least a 20% down payment unless the mortgage is insured against default. So for high-ratio mortgages where your downpayment is less than 20%, you would certainly need mortgage default insurance. In some instances, if the home or property is in a remote location, the bank might require mortgage default insurance even though your downpayment is beyond 20%. 

This insurance also helps a buyer to get into building home equity sooner if they have less than 20% to contribute towards the purchase of the property. It is offered by multiple insurers; primarily by Canada Mortgage Housing Corporation (CMHC), Sagen (formerly called Genworth Financial) and Canada Guaranty Mortgage Insurance Company. 

Some finer points to understand this mortgage default insurance better, 
It protects the lending institution and not really the borrower 
Only available for homes which are priced under a million 
Premium is calculated based on the percentage of the amount borrowed 
The mortgage amortization cannot be longer than 25 years 
The premium is generally back-end loaded, meaning that it is added to your mortgage principal and paid monthly over the amortization term, so it is not to be paid at once at the time of purchase. BTW, here, you do have the option to pay the premium as a lump sum when your mortgage begins. 

Now let us also look at how the mortgage default insurance premiums are calculated,  this table gives you insight into the tiered rates on various Loan to Value Ratios.

The main thing which I want to highlight is that the premium calculation is at a tiered level, so a buyer who is doing 10% down Payment will pay the same amount of premium as a buyer who is doing 14.5% as the down Payment. This means that it is in our best interest to reach the maximum slab, which we can within our means at the time of securing the borrowing terms with the bank. 
Let us go through a couple of premium calculation samples: 

Scenario 1

Purchase Price: $600,000 
Down Payment: $60,000 
Mortgage Loan Amount $540,000 
Loan to Value Ratio: 90% 
Premium on the total loan amount: 2.40% of $540,000 = $12,960 

Scenario 2

Purchase Price: $600,000 
Down Payment: $30,000 
Mortgage Loan Amount $570,000 
Loan to Value Ratio: 95% 
?Premium on the total loan amount: 3.60% of $570,000 = $20,520 

It is seen that insured mortgages generally tend to have better rates for consumers than uninsured mortgages. 
Let us review on how it works when a consumer defaults on a mortgage with an example scenario. Suppose, Rita and Trevor bought a home for $900,000, and their outstanding mortgage is $800,000. With a change in their job situations, they cannot keep up with the mortgage payments and have defaulted on their payment terms. 
The market is going through saturation, and the bank can sell the property only at $750,000 as a power of sale. Since the outstanding mortgage is $800k, the insurance provider pays out the remaining balance of $50k to the financial institution. 

Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate and we will do our best to help.

Mudit Mehta 
Broker of Record
Off: 416-816-6001 | info@elixirrealestate.ca