August 23rd 2021
Buying & Selling: Know the Risks of Mortgage Insurance in Canada
By Corey Sherwood
Since December 2020, Canadian house prices have skyrocketed by 17.9% — one of the steepest increases on record. It's no wonder many Canadian homebuyers are looking for solutions to help them navigate the steep slope of housing market trends. One tool for supporting new homebuyers is mortgage insurance, which helps Canadians with down payments on homes, allowing them to afford more houses on the market.
But information on mortgage insurance in Canada is few and far between — and when you can find it, it’s often confusing. This is especially true when there are multiple types of mortgage insurance available. So how can people know they’re getting the right insurance? This article will outline the risks and rewards of choosing mortgage insurance in Canada and how to find the right home buying plan for you.
What is mortgage insurance?
Mortgage insurance, sometimes referred to as mortgage default insurance, is used to purchase a home with a down payment of less than 20% of the home's total cost. All mortgages with a down payment of less than 20% must have mortgage default insurance, but it’s optional if you can provide a downpayment of 20% or higher. This is not to be confused with mortgage life insurance, which has no minimum contribution limits and works by paying off the outstanding principal balance of your mortgage should you suffer a terminal illness or worse.
The purpose of mortgage default insurance is to protect your lender if you can't make your payments. Without it, mortgage rates would be much higher, as the risk of defaulting would increase. With mortgage insurance, lenders can offer lower and variable mortgage rates because the risk of default becomes the responsibility of the mortgage issuer. They also help stabilize the housing market by allowing people who cannot save 20% of a down payment the ability to fund mortgages.
In Canada, mortgage default insurance can be an excellent tool for new homebuyers trying to break into the market. However, Canadian homebuyers still have some risks involved when signing up for mortgage insurance.
What are the risks?
Although mortgage insurance can help the housing market and Canadian buyers in general, it requires some specific checkpoints to qualify. When qualifying, most banks require a credit score of at least 680 for a mortgage. They also need a debt service (DS) ratio of less than 35 for Gross DS and less than 42 for Total DS. Finally, a standard qualification from providers is that the money used for the down payment is not borrowed.
Another thing to look out for when buying mortgage insurance in Canada is the parameters of the actual insurance. For example, mortgage insurance is unavailable to properties costing $1 million or over. Properties ranging from $500,000 to $999,999 require a higher down payment, starting at 5% of the first $500,000 and 10% for the remaining amount. This means as housing prices continue to rise, less and less housing will be eligible for mortgage insurance. Also, with mortgage insurance, the maximum amortization for insured mortgages is 25 years, leaving fewer options for long-term home buyers.
If you qualify for mortgage insurance, there are still some risks to consider. For one, lenders pay an insurance premium on mortgage insurance. It's calculated as a percentage of the mortgage and is based on the size of your down payment. Your lender will likely pass this cost on to you, meaning you’ll make those premium payments. You can opt to pay the total amount in a lump sum or add it to your mortgage payments. However, all mortgage loan insurance companies charge the same premiums to the lenders, meaning you’ll get the same premiums no matter where you go.
It's also important to keep in mind that when paying off your mortgage insurance you’ll also be paying for your home maintenance, repair, and property taxes, so all the expenses can add up to significant monthly payments.
What can you do?
There are tons of resources online that can help you make a decision about whether or not mortgage insurance is right for you. Organizations like the CMHC (Canada Mortgage and Housing Corporation) have helpful charts that help determine mortgage insurance costs. There are also mortgage insurance calculators that you can use to see the complete cost analysis of your insurance. Banks like TD Canada Trust and Sunlife Financial offer mortgage insurance calculators to their account holders, so check with your bank to see if you have options.
It's also good to speak with professionals who understand the real estate market and determine your needs. Consulting with a bank or real estate company can offer a great opportunity to better understand what your mortgage insurance will look like.
Some companies, like Properly, specialize in matching clients with agents who possess extensive knowledge of all kinds of home dilemmas, including mortgage insurance. By sitting down with professionals, you can find ways to save on mortgage insurance in Canada. They can inform you of deals and offers available to Canadian homebuyers like you. Some deals, like the "Energy-Efficient Home," could reward you up to a 25% premium refund on your mortgage insurance. Bonuses and perks like this can help you cut down costs and make those monthly payments more manageable.
The fact that you’re reading this article means you’ve taken the first step in dealing with the risks of mortgage insurance: educating yourself. Mortgage insurance can be financially risky with its premiums and overall monthly costs, but it allows new Canadian homeowners into the market by making houses more affordable. Luckily, resources to help calculate premiums and interest on mortgage insurance are readily available online so you can figure out your rates before making a down payment.
While mortgage insurance can help Canadians own a home, you should take time to think about your decision and consult groups like Properly to ensure it's the right choice for you.