If you haven’t heard of Mortgage Default Insurance before and you’re a first-time homebuyer in Niagara, don’t worry, you’re not alone and I’m here to help explain what this is.
Mortgage Default Insurance is often overlooked but can have a major impact on the overall cost of your mortgage.
This type of insurance protects the lender, not the homebuyer, for cases where there is a default on the mortgage loan (for when a homebuyer fails to make their mortgage payments).
Mortgage Default Insurance is required by lenders in situations where homebuyers make a down payment of less than 20% of the home’s purchase price – in that situation, the homebuyer must pay an insurance premium to the Canada Mortgage and Housing Corporation (CMHC).
There are 3 different tiers of insurance premiums (5%, 10% and 15%) for Mortgage Default Insurance, as well as 3 default insurers in Canada (CMHC, Sagen, Canada Guaranty). The premium that you pay depends on how much your total down payment is.
For example, if you buy a $100,000 home and you make a down payment of $5,000 (the minimum 5% down payment), then your subtotal for your mortgage would be $95,000 (Loan-to-Value) and your insurance premium (Standard Purchase Premium) would be 4% (see above chart) – this means that you would have to pay an additional $3,800 on your mortgage, plus Provincial Sales Tax (PST), to cover the required insurance premium fee.
If you were to increase your down payment from $5,000 to $10,000, then your mortgage subtotal would be $90,000 and your insurance premium would be decreased to $2,700, plus PST, at 3.1% (see above chart).
Therefore, it’s recommended that you make a larger down payment, when possible, in order to save on interest in the long run.
If you make a down payment of 20% or more on your home, there is less risk taken on by the lender and you wouldn’t have to pay for Mortgage Default Insurance.
For many homebuyers in Niagara, and across Canada, it’s not possible to make a down payment of 20% or more – this is why Mortgage Default Insurance exists.
Sure, it costs the home buyer more in the long run if they’re unable to make a down payment of 20% or more, but they’re still able to get their skin in the game and start their own homeownership journey.
Once you hit that 20% threshold on your mortgage payment, then you are no longer required to pay for Mortgage Default Insurance.
If you have any questions regarding Mortgage Default Insurance, or anything relating to mortgages, feel free to give me a call and I’ll gladly help wherever I can.
Kevin Ashcroft – Mortgage Broker