When you decide to buy a home in Canada, you’re not just investing in property; you’re taking on the responsibility of maintaining it, protecting it, and ensuring its financial viability. When it’s time to sell, you expect a certain return on your investment. Mortgage insurance plays a crucial role in that last part. It might sound like just another piece of paperwork, but it’s a key player in the grand scheme of things.
While it might look like one extra cost to worry about, it is highly recommended for first home buyers. Let’s get started and learn more about how mortgage insurance works in Canada.
What is Mortgage Insurance?
In the simplest terms, mortgage insurance protects the lender, not you, in case you default on your loan. In Canada, if you make a down payment of less than 20% of the home’s purchase price, you’re required to purchase mortgage insurance. The amount is added to your mortgage premiums.
Once you own 20% equity in your property, you can choose to stop paying mortgage insurance. This insurance is offered through three major providers: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and Canada Guaranty.
Why Do I Need Mortgage Insurance?
1. Lender’s Requirement
If your down payment is less than 20%, Canadian lenders will require you to have mortgage insurance. It’s a way for them to mitigate the risk of lending you money.
2. Access to Homeownership
While the idea of paying an additional insurance premium might not sound appealing, mortgage insurance actually provides many Canadians with an opportunity to enter the housing market sooner. Without it, lenders would likely charge higher interest rates for those deemed higher risk.
3. Better Interest Rates
Even though you’re paying for the insurance, having it can sometimes qualify you for better interest rates, given that the risk to the lender is reduced.
How Much Does It Cost?
The premium you’ll pay depends on the size of your down payment and the amount of your mortgage.
- A down payment of 5% (the minimum in Canada) might come with an insurance premium of around 4% of the mortgage amount.
- A down payment of 15% might have a premium of about 2.8% of the mortgage amount.
- A down payment of 65% might have a premium of about 0.6% of the mortgage amount.
If you opt for CMHC-insured financing to buy an energy-efficient home, or if you purchase an existing home and carry out energy-saving renovations, you may be eligible for savings on your insurance premium. There are several tools like the CMHC’s mortgage insurance calculator to get an accurate estimate.
Can I Avoid Paying Mortgage Insurance?
The straightforward way to avoid mortgage insurance in Canada is to make a down payment of 20% or more. However, this isn’t feasible for everyone, especially in markets like Vancouver or Toronto, where home prices can be particularly steep.
You may choose a shorter amortization period as a longer one poses a bigger risk for the lender. Once you hit 20% equity and choose to refinance your mortgage, you can stop paying for insurance.
Is Mortgage Insurance the Same as Mortgage Life Insurance?
No, they’re different. While mortgage insurance protects the lender, mortgage life insurance protects you. If something were to happen to you, mortgage life insurance would cover the remaining balance of your mortgage, ensuring your family isn’t burdened with payments. Don’t confuse it with a life insurance policy as that one gives your heir a payment, while mortgage life insurance doesn’t. However, it’s important to note that if the mortgage has been fully paid off, there would be no benefit payout from this insurance.
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