The ABCs of Mortgages

Mortgage Default Insurance

High-ratio mortgages (mortgages with less than 20 per cent down payment) must, by law, be insured against default. This type of insurance is offered by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or through an approved private insurer. To find out which companies offer mortgage default insurance, contact FCAC. Your lender will arrange for the purchase of mortgage default insurance. With mortgage default insurance, if you default on your mortgage, the lender is paid back by the insurer.

It should be noted that mortgage default insurance protects the lending institution only. If you default on your mortgage and the proceeds from the sale of your house are not sufficient to pay the outstanding balance on your mortgage, the lending institution will be covered by mortgage default insurance. Note that, in such a case, you would still lose your house.

Before approving you for mortgage default insurance, the mortgage insurer generally makes an assessment of your credit and may require you to pay an application or appraisal fee to process your file and confirm the approval of the mortgage. This fee covers the insurer's costs associated for that assessment. In some cases, the lending institution may pay this fee.

Normally, the down payment you make must come from your own funds. If you borrow the money (from a line of credit, personal loan or credit card), a higher mortgage default insurance premium applies.

The mortgage default insurance premium varies according to your down payment. The bigger your down payment, the lower your mortgage default insurance premium. Typically, mortgage default insurance premiums vary between 0.5% and 3% of the borrowed amount.

The mortgage default insurance premium may be paid in cash or added to your mortgage. Although the second option seems interesting, remember that it is more costly, since you would have to pay interest charges on the amount of the premium.

Conventional mortgages (mortgages with at least a 20 per cent down payment) do not, by law, have to be insured. However, there may be instances where mortgage default insurance will be required if your loan is considered risky. In this case, the mortgage default insurance premium will typically be less than 1 per cent of the borrowed amount.