April 12, 2012
What is Mortgage Default Insurance anyway? Well let’s begin with what it does. Mortgage Default Insurance also goes by its sister name—mortgage loan insurance. It was designed as a risk minimizing measure to protect lenders in case you the borrower are not able to make your mortgage payments.
Let’s be clear about something folks, Mortgage Default Insurance does not protect you. The rules is, if your down-payment is below 20% of the purchase price of a home—then you must pay this insurance. The technical term for down-payments under the 20% mark is called a high-ratio mortgage.
A conventional mortgage on the other hand, describes down-payment scenarios where the buyer has at least 20% or above of the purchase price of the home. Generally speaking, Mortgage Default Insurance is isn’t required under this scenario. Of course in life there always exceptions to the rule, for instance in situations where the borrower’s salary is not paid on a regular, consistent basis—h/she might be considered a higher risk and, as a result would most like be required to obtain mortgage default insurance.
Let’s draw for an example: Assume Hillary is considering a purchase of a $200,000 home, and she can come up with a down payment of $35,000. Hillary’s down-payment is 17.5% of the purchase price of the home.
$35,000 ÷ $200,000 x 100 = 17.5%
Because Hillary’s down payment falls below the 20% mark, she’ll therefore need to obtain Mortgage Default Insurance.
So who offers mortgage default insurance?
Three players dominate the field. Well, sorta. The first one (CMHC) actually controls holds approximately 85% Market Share and is Crown Corporation.
- Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial
- Canada Guaranty Mortgage Insurance Company.
By default your lender arrangements for your M.DI. when it’s required.
What about Premiums, how much does this cost?
This amount is gonna vary depending on the amount of your down payment. Simply put, a bigger down-payment means a lower your mortgage default insurance premium. The typical range though can vary from around 0.5% to 3% of the borrowed amount. For amortization periods that go beyond 25 years (now very hard to obtain on a high mortgage), the premium will be higher.
Another Example for your reading pleasure
Suppose Hillary’s down payment of $35,000 is 17.5% of the $200,000 purchase price of the home? Again, since her down payment is less than 20%, M.I.D would be required. Lets assume that
- the premium is added to the mortgage of $165,000
- the insurance premium rate is 2%
- the mortgage will be amortized over 25 years
- the interest rate is 5%.
The mortgage default insurance premium will cost $165,000 x 2% = $3,300. The new total mortgage loan would then be $165,000 + $3,300 = $168,300
Notice that in the above example, the insurance would cost Hillary $3,300 and would then be added to the mortgage total. The monthly payment would increase from $960 to $979. Over the amortization period, the mortgage default insurance would cost her an additional $2,458 in interest, ouch!
Are there any other insurance options out there?
Mortgage life insurance
Alright, so this is the sombre part: mortgage life insurance pays the remaining balance on your mortgage to the lender in the event of death. Strategic if you have dependents or a spouse who might like to stay in the home after your death — but who might not be able to continue making the same mortgage payments as before. Bare in mind also that your property can be sold/liquidated to pay back the mortgage, so speak to a financial advisor as to whether o not mortgage life insurance is necessary for you.
What about Mortgage disability insurance?
What happens if you cannot work due to illness or a severe injury? This is where mortgage disability insurance might come in handy. Read the small print very carefully kids, most disability insurance plans are loaded with this and that number of conditions attached, including a specific list of illnesses or injuries that might be covered or excluded. It’s important be mindful that some pre-existing medical conditions may not be covered. These terms and conditions of insurance are usually listed in the insurance certificate, so ask to see it before you apply so that you understand exactly what you’re getting into.
What’s the Cost of these insurance options?
Premiums usually depends on your mortgage amount and your age. Where can I find out more about these insurance options? You can typically obtain mortgage life and disability insurance through your mortgage lender, or through another insurer or financial institution. It’s a good idea though to work with a financial advisor who has your best interest at heart.