As a Mortgage Agent, I noticed that many clients get confused with the different insurances products available to them when securing a mortgage.
Mortgage Loan Insurance
The first insurance is the Mortgage Loan Insurance or Default Insurance. This insurance takes place when there is a home purchase with down payment being less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default and enables borrowers to purchase homes with a minimum down payment starting at 5% for most competitive interest rates.
The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is more than $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000.
The premium is added to your mortgage loan amount and included in your monthly payments. The amount of the mortgage loan insurance premiums range from 0.6% to 4.5% and are based on Loan to Value percentages. The Loan to Value amount is determined by the percentage of the purchase price you choose to deposit in the form of a downpayment. The more downpayment there is, the less your insurance premium will be.
The default insurance works in tiers. 5% downpayment attracts a 4% premium, a 10% downpayment attracts a 3.1% premium and a 15% downpayment attracts a 2.8% premium of the loan amount after downpayment .
There are 3 companies that lenders deal with regarding the mortgage loan insurance. They are:
- Canada Mortgage and Housing Corporation (CMHC) which is a government department
- Canada Guaranty which is a Canadian-owned private mortgage insurer
- Sagen (formerly Genworth), also a private mortgage insurer
Life & Disability Insurance
The next insurance that is involved with home financing is life and disability insurance. Being a mortgage broker with Dominion Lending Centres HT Mortgage Group in Grande Prairie, Alberta, we have a specific life and disability insurance we offer through Manulife. This insurance is called Mortgage Protection Plan (MPP). What many do not realize is that this is a “debt” insurance which means Manulife would pay the amount left owing on the mortgage in the event of death. In the event of disability Manulife would pay your monthly payments on the mortgage as well as property tax monthly payments. MPP is a unique debt insurance in that it is portable. If the borrower decides to sell their house and purchase a different house, with a different mortgage, the insurance is ported to the new mortgage; even if it is a different lender than the previous mortgage.
Another insurance that gets brought up once mortgage financing has been approved is referred to as either home or fire insurance. In Canada, anyone purchasing a home MUST be able to prove they have a fire insurance policy in place before they will be allowed to take possession of the property. This insurance is purchased through a home insurance company. In Alberta we have insurance brokers who are similar to mortgage brokers in that they do the “shopping around” with all of the different insurance companies to find the best policy for the borrowers situation.
***Reference CMHC website: https://www.cmhc-schl.gc.ca/