Here's what you need to know about mortgage default insurance

Mortgage default insurance is required by the Government of Canada when home buyers are putting down less than the 20 per cent payment typically needed to qualify for a conventional mortgage. 123RF

If you are considering purchasing a home and do not have 20 per cent of the purchase price for a down payment, then you will be required to pay for mortgage default insurance.

Under the Bank Act, banks may lend up to 80 per cent of the purchase price of a residential property or its appraised value (often called the loan-to-value ratio), whichever is lower, without requiring the mortgage to be insured by a mortgage default insurance company. This type of mortgage is generally referred to as a conventional mortgage.

Mortgage default insurance is required by the Government of Canada when home buyers are putting down less than the 20 per cent payment typically needed to qualify for a conventional mortgage. This type of mortgage is referred to as a high ratio mortgage and the insurance compensates mortgage lenders when there is a mortgage default.

To be eligible for mortgage default insurance, you will first need to meet your bank’s regular lending qualifications, as well as the underwriting standards of your mortgage insurer. The insurance is offered by a number of mortgage insurers, including Canada Mortgage and Housing Corporation (CMHC) and other insurers approved by the Office of the Superintendent of Financial Institutions. Each mortgage insurer has its own criteria for evaluating the borrower and the property and it decides whether or not a mortgage can be insured.

While this insurance is primarily protecting your lender from losing money if you default, it can also benefit you by allowing you to buy a home sooner with a down payment as low as five per cent.

Other things to know about mortgage default insurance:

It provides protection to the mortgage lending institution only; it does not protect you or your interest in the property.
It does not cover your mortgage payment if you are unable to pay it or if you pass away.
It’s only available for residential homes priced under $1,000,000.
Your premium is calculated as a percentage of the amount borrowed.
The bigger your down payment, the lower your premium will be — amortization period, property value, type of occupancy and owner’s employment also factor into the premium’s calculation.
Your mortgage insurance premium can be added to the total balance of the mortgage and paid monthly over the amortization term (maximum of 25 years) so you don’t have to pay it all at once.

For further helpful advice, meet with a mortgage specialist.