Mortgage insurance is an essential aspect of the homebuying process, especially for those who cannot afford a large down payment. Understanding how mortgage insurance works and its benefits can help you make informed decisions about your mortgage. At Kingsdale Mortgage Centre, we provide expert guidance to help our clients navigate the complexities of mortgage insurance. In this blog, we will explain what mortgage insurance is, how it works, and why it might be necessary for your mortgage.
What is Mortgage Insurance?
Mortgage insurance is a type of insurance that protects lenders against the risk of default by borrowers. It is typically required for borrowers who make a down payment of less than 20% of the home’s purchase price. There are two main types of mortgage insurance: private mortgage insurance (PMI) and mortgage default insurance provided by government-backed programs like the Canada Mortgage and Housing Corporation (CMHC).
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is typically required for conventional loans with a down payment of less than 20%. PMI is provided by private insurance companies and protects the lender in case the borrower defaults on the loan. The cost of PMI is usually added to your monthly mortgage payment.
Advantages of PMI
- Lower Down Payment: PMI allows borrowers to purchase a home with a down payment of less than 20%, making homeownership more accessible.
- Flexibility: PMI can be cancelled once you have built enough equity in your home, typically when your loan-to-value ratio reaches 80%.
Disadvantages of PMI
- Additional Cost: PMI adds to your monthly mortgage payment, increasing the overall cost of your loan.
- Not Tax-Deductible: Unlike mortgage interest, PMI premiums are not tax-deductible.
Mortgage Default Insurance (CMHC)
In Canada, mortgage default insurance is required for high-ratio mortgages (loans with a down payment of less than 20%). This insurance is provided by the Canada Mortgage and Housing Corporation (CMHC) and protects lenders against the risk of borrower default. The cost of CMHC insurance is usually added to your mortgage amount and amortized over the life of the loan.
Advantages of CMHC Insurance
- Lower Down Payment: CMHC insurance allows borrowers to qualify for a mortgage with a down payment as low as 5%.
- Competitive Rates: With CMHC insurance, lenders are more willing to offer competitive interest rates to borrowers with smaller down payments.
- Accessible Homeownership: CMHC insurance helps make homeownership more accessible to a wider range of borrowers.
Disadvantages of CMHC Insurance
- Additional Cost: The cost of CMHC insurance is added to your mortgage amount, increasing the overall cost of your loan.
- Not Removable: Unlike PMI, CMHC insurance cannot be cancelled once you have built equity in your home.
How Mortgage Insurance Works
When you take out a mortgage with less than a 20% down payment, your lender will require mortgage insurance. The insurance premium can be paid upfront or added to your monthly mortgage payments. In the event you default on your mortgage, the insurance compensates the lender for the loss, reducing their financial risk.
Calculating Mortgage Insurance Premiums The cost of mortgage insurance premiums depends on several factors, including the size of your down payment, the loan amount, and the type of insurance. For example, PMI premiums typically range from 0.3% to 1.5% of the loan amount per year, while CMHC premiums range from 2.8% to 4.0% of the mortgage amount.
Cancelling Mortgage Insurance In the case of PMI, you can request cancellation once you have built up enough equity in your home, usually when your loan-to-value ratio reaches 80%. For CMHC insurance, the premiums are amortized over the life of the loan and cannot be cancelled.
Conclusion
Mortgage insurance is a vital tool that enables borrowers with smaller down payments to achieve homeownership. Understanding the different types of mortgage insurance, how they work, and their advantages and disadvantages can help you make informed decisions about your mortgage. At Kingsdale Mortgage Centre, our experienced brokers are here to guide you through the mortgage process, including navigating the complexities of mortgage insurance. Contact us today to learn more about how we can assist you in securing a mortgage that meets your needs and goals.
