What is Mortgage Insurance in Canada?

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Do you know what is mortgage insurance in Canada? It doesn’t matter if you’re a first-time home buyer or looking to upgrade. Some people will say mortgage insurance is a must, while others say it’s not worth it. Whether it’s right for you depends on your specific situation. Once you understand how mortgage insurance works, you can make an informed decision whether you need it or not.

What is mortgage insurance in Canada?

The first thing to understand is that there are two types of mortgage insurance in Canada. First, there’s mortgage default insurance meant for first-time home buyers with a high ratio mortgage. Then there’s mortgage protection insurance, which is optional for all homeowners.

If you’re buying a home with a down payment of less than 20% of the purchase price, mortgage default insurance is mandatory. Basically, it protects the lender if you default and can’t make your mortgage payments. 

Mortgage protection insurance is just another insurance policy. Essentially, this policy would pay the remaining balance of your mortgage if you were to pass away. You can also purchase additional options that cover disability, critical illness, or job loss.

How does mortgage default insurance work?

In Canada, the amount of your down payment will determine if you need mortgage default insurance and how much you’ll pay. The minimum down payment requirements are as follows:

  • 5% if the home costs $500,000 or less.
  • 5% of the first $500,000 and 10% on the remainder if the home costs less than $1,000,000.
  • 20% if the home costs $1,000,000 or more.

Since mortgage default insurance only applies to high ratio mortgages, you only need to get it if your down payment is less than 20%.

CMHC used to be the primary mortgage default insurance provider, but Sagen and Canada Guaranty now also offer it. Don’t worry, you don’t need to apply for this separately from your regular mortgage. Instead, your lender will apply for it on your behalf.

How much does mortgage default insurance cost?

As you can imagine, mortgage default insurance is not free. The cost of mortgage default insurance ranges from 2.8% to 4% of your mortgage amount. The lower your down payment, the more you need to pay in insurance. This fee is usually added to your regular mortgage payments. That said, you can also pay it in a lump sum if you have the funds available.

For example, let’s say you’re looking to buy a property that costs $500,000 and you have a down payment of 5%. That means you would need a mortgage of $475,000. In this case, your mortgage default insurance would cost you 4% of the mortgage, which works out to $19,000. That means your total mortgage amount is $494,000. 

Keep in mind that lenders will factor in mortgage default insurance when determining how much mortgage you can afford. Since your monthly costs will increase, the amount of mortgage you’ll qualify for will likely decrease.

What is mortgage protection insurance?

Mortgage protection insurance is an optional type of insurance. If you purchased this insurance and you were to suddenly pass away, your insurance would pay the remaining balance on your mortgage. In addition, you can purchase extra options such as:

  • Critical illness insurance
  • Disability insurance
  • Job loss insurance

In each situation, the payout would be specific. For example, some lenders may state the maximum payout if you were to pass away is $750,000 or job loss payments are up to $3,500 a month for up to 6 months.

Mortgage protection insurance can be important for people who have dependents. For example, let’s say you bought a home with your spouse. Most families would only be able to afford the payments and their day-to-day expenses while there are two incomes. If one income was lost, it might only be a matter of time before the household finances crumble. That’s why people are interested in mortgage protection insurance.  

How much does mortgage protection insurance cost?

The cost of mortgage protection insurance depends on your age and mortgage balance when you apply. The good thing is that once you’ve purchased this insurance, your premiums do not increase over the term. That said, if your mortgage balance increases or you need to refinance, you may want to get in touch with your lender to see how that affects your coverage.

Mortgage insurance vs life insurance

There’s often a debate between mortgage insurance vs life insurance, but honestly, there’s no argument. With life insurance, if you were to pass away, the sum you’re insured for goes to your beneficiary and can be used in any way they want. Most people will use it to pay for their mortgage, but they can also use it for things such as funeral expenses and even the future education costs for their child.

Mortgage protection insurance only covers the balance of your mortgage. So yes, your mortgage will potentially be paid off, but there will be no other funds left for your loved ones. Also, as you pay off your mortgage, the amount paid with mortgage protection insurance decreases. That’s not the case with life insurance.

In other words, getting life insurance is almost always the better solution if you’re looking for protection. Companies such as PolicyMe allow you to get insured quickly as things can be done online. The cost of life insurance depends on your age and health. Generally speaking, the younger you are, the lower your costs.

Mortgage default insurance vs mortgage protection insurance

If you’re still trying to figure out what is mortgage insurance in Canada, your best bet is to look at the differences as it’ll be easier to understand.

Mortgage default insurance works like this:

  • It’s mandatory if your down payment is less than 20%
  • It protects your lender if you default on your mortgage
  • Your lender applies for it for you
  • The premiums are based on a percentage of the size of your mortgage
  • Payments are added to your monthly mortgage payments or can be paid as a lump sum

Mortgage protection insurance works like this:

  • It’s optional
  • It pays out if you were to suddenly pass away
  • You can purchase additional insurance options that will pay out if you become critically ill, suffer a job loss, or become disabled
  • Can be added to your mortgage at any time
  • Must be purchased from your lender
  • The cost typically depends on your age and the balance of your mortgage
  • Life insurance may be a better option

As you can see, these two types of mortgage insurance are different products. 

Is mortgage insurance mandatory in Canada?

Yes and no. Mortgage default insurance is mandatory for buyers with a down payment of less than 20%, but mortgage protection insurance is optional. As you’ve already learned, life insurance is a better product since the premiums are similar but the payout is potentially higher.

Technically speaking, life insurance is always optional, but if you have a mortgage and dependents, getting term life insurance is highly recommended. The last thing you want is for your loved ones to face financial hardship if you’re to suddenly pass away.

Final thoughts

Knowing what is mortgage insurance in Canada isn’t the only thing you need to be aware of as a first-time home buyer. You’ll also want to get familiar with the differences between fixed and variable mortgages, as well as the mortgage stress test

By understanding how mortgages work in Canada, you’ll be more prepared during your home search. But, more importantly, once you put in a winning bid, you’ll know what comes next.

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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