Mortgage loan insurance (or protection insurance) is one of the big questions that arises when you're taking on a new mortgage. Whether it's your first time buying a home or your second or third home, mortgage insurance is always a part of the conversation.
While it is such a necessary question when taking on a new mortgage, many people are confused about what mortgage insurance actually is. Let's take a look at what mortgage insurance is, whether you need it and how it can benefit you when you do need it.
What Is Mortgage Insurance?
When you take on a mortgage, you as the homeowner are borrowing a substantial amount of money from a lender. Mortgage lenders want to be careful about who and how much they lend money to. One of the things they put in place to protect themselves is mortgage insurance.
Mortgage insurance (also called mortgage default insurance) protects lenders in a situation where you can't make mortgage payments. If you can't make payments, the lender will turn to the insurance company to see that the amount of money they lent out will return to them. Additionally, while the insurance covers the lender, it is paid for by you as the homeowner.
It's important to note that mortgage insurance has nothing to do with protecting you as the homeowner. If you're looking for protection against fire, theft or other damage to your home or property, you will be needing separate homeowners insurance for that.
How Does Mortgage Insurance Benefit Me?
This is a fair question to ask as mortgage insurance might seem like an insurance scam at first glance. However, with soaring housing prices across the country and lenders being willing to work with down payments as little as 5%, it's understandable that they might want protection.
Historically, lenders have required a 20% down payment on the purchase price of a new home. With many starter homes in certain parts of the country being priced so high, it's nearly impossible for homeowners to reach that threshold putting 20% down.
To level the playing field for you as a homeowner, lenders have lowered the down payment requirement on homes but require mortgage insurance instead. This benefits you as the homeowner in a significant way as mortgage insurance is notably cheaper than having to come up with an extra 10-15% for a downpayment.
How Much Does Mortgage Insurance Cost?
Let's suppose you are looking to purchase a home that is worth $400,000. Traditionally you would be required to come up with a down payment of $80,000 (20%). This is a large lump sum to come up with, so instead you agree with your lender to put down $40,000 (10%) leaving you with a mortgage of $360,000.
A mortgage insurance rate of 3.5% on that amount demands that you pay $12,600 in insurance premiums. While this isn't a small amount of money, it's less than the additional $40,000 you would need if your lender required a 20% downpayment. This gets you in the housing market sooner so you can start or continue building equity through your home.
Mortgage Insurance Providers
In Canada, there are several mortgage insurance providers. Canadian Mortgage and Housing Corporation (CMHC) is by far the most popular to the point where the term mortgage insurance and CMHC insurance are almost interchangeable. Canada Guaranty is another insurance provider as well as Sagan (formerly Genworth).
The primary difference between these providers is that CMHC is a publicly owned corporation while Sagan and Guaranty are private. While insurance rates are generally quite comparable between the three providers, many homeowners and lenders work with CMHC because of their public status.
Is Mortgage Insurance For You?
Unlike other factors you need to weigh when purchasing a new home, the need for mortgage insurance is fairly simple to evaluate. Any time you are putting less than 20% down on the purchase price of your home, you will need mortgage insurance.
Whether this helps you out financially or whether you should wait until you can save up for that larger down payment is up to you. Don't hesitate to chat with a financial advisor or mortgage specialist if you are questioning what might be the best option for you.