What is Mortgage Loan Insurance? The full 2024 guide
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Do you know the down deposit you need to buy a home today? Like many, you might think that it’s 20%. This is because, before 1954, a 20% downpayment was a requirement for potential homebuyers. Fortunately, times have changed.
Today you can buy a property with as little as a 3% down payment. The caveat, however, is that if you decide to purchase a home with less than a 20% down payment, you must buy mortgage loan insurance.
Not sure what the mortgage loan insurance is? Don’t fret. This article provides a deep dive into mortgage loan insurance, explaining how it works, who offers it, and how much it costs.
Mortgage Loan Insurance: 4 Key Takeaways
- Provides lenders with coverage in the event of default and not borrowers
- Gives prospective homebuyers the ability to purchase property with a minimal down payment of 5%
- Only offered by CMHC, Sagen, and Canada Guaranty
- Premiums are fixed depending on your loan value and down payment
What is mortgage loan insurance?
Mortgage loan insurance, also referred to as mortgage default insurance, is an insurance policy that all homebuyers must purchase if they plan to buy a home with anything less than a 20% down payment.
It was introduced by the Canadian government as part of the National Housing Act to make property ownership more accessible while also protecting lenders and the overall housing market.
Mortgage loan insurance has been designed to help individuals buy property with a minimal down payment, getting them on the property ladder earlier than they otherwise could, and to help protect lenders against borrowers defaulting on loans.
It does this by providing a guarantee to lenders that they will be covered for mortgage defaulting clients, while simultaneously allowing Canadians an opportunity to buy property with a lower down payment than would otherwise be necessary.
Simultaneously, due to the added safety, mortgage lenders are incentivized to offer more affordable mortgage rates which leads to a more balanced market and benefits Canadians in general.
As explained, mortgage loan insurance protects the lender against the borrower's default on high-ratio mortgages, Mortgage life insurance, on the other hand, pays off the remaining mortgage balance to the lender if the borrower dies. We will discuss this further in the sections below.
So if you want to make sure your mortgage is taken care of should you pass away, you must explore mortgage protection insurance options. You can do it right here using our free comparator tool below. Compare the best plans and get free personalized quotes now.
The best mortgage life insurance
How does mortgage loan insurance work?
Borrowers with a smaller down payment are usually considered higher risk because the lender has to provide them with more money that they trust will be repaid. Normally, borrowers who offer a lender a larger down payment demonstrate that they are more financially stable, financially committed to the purchase, and better at managing their money overall.
The outcome is that the lender will see such borrowers as a lesser risk and be more inclined to offer them more favorable lending terms and lower interest rates.
Contrarily, borrowers who can only pay smaller a down payment on a home purchase, indicate to the lender that they aren’t as financially secure. Whether true or not, unfortunately, in today’s market, it has become increasingly difficult to save enough to put down a substantial down payment on a property. The solution, therefore, lies in mortgage loan insurance.
Mortgage loan insurance works by giving lenders an incentive to loan money to borrowers who cannot provide a large down payment because, if the borrower is unable to pay their mortgage, the mortgage loan insurance will protect the lender’s financial investment.
Lastly, since this insurance policy covers your provider as opposed to you, the borrower, the protection will be organized by your lender. However, the premium will be paid by the borrower.
Mortgage Loan Insurance Premiums
The mortgage loan insurance premium can be paid as either a lump sum, adding the price to your property closing costs, or added to your ongoing mortgage payments. While the latter makes the cost more bearable, it will be more expensive over the long term as interest is accrued on the premium.
Where can I buy mortgage loan insurance?
Mortgage loan insurance cannot be purchased by homebuyers like other insurance products. As it is a program put in place by the Canadian government, there are only a few companies that offer mortgage loan insurance and the policy itself is organized on your behalf by your mortgage company.
The three companies in Canada that offer mortgage loan insurance are:
- Canada Mortgage and Housing Corporation (CMHC)
- Sagen (formerly Genworth)
- Canada Guaranty Mortgage Insurance Company
CMHC mortgage loan insurance is the leading provider in Canada because it is associated with the Canadian government. This makes it slightly rigid in its offerings when compared to the private providers Sagen and Canada Guaranty Mortgage Insurance Company.
However, since the coverage is bought on your behalf by your mortgage lender, you likely will not get a choice regarding your insurance provider. Fortunately, the product offerings don’t vary greatly and the price remains consistent across the various insurers.
If you’re looking for mortgage insurance that covers you if you are unable to pay your mortgage, look no further. Our free online comparison tool below provides quotes from all the best private mortgage insurance providers in Canada.
Compare mortgage life insurance in seconds
What are the advantages and disadvantages of mortgage loan insurance?
There are numerous advantages and disadvantages of mortgage loan insurance depending on how it’s viewed. Unfortunately, since it is a government-mandated insurance cover, many new homebuyers consider mortgage loan insurance to solely be a burden that adds cost when they’re closing on a home.
The consideration that mortgage loan insurance is one of the main reasons why they can purchase a home with a minimal down payment in the first place, with a reasonable interest rate, is usually overlooked or not understood. However, since mortgage insurance is paid for by the homebuyer while only providing coverage to the lender is a very real frustration.
Regardless of the perception of the advantages and disadvantages of mortgage loan insurance, borrowers should be aware of the following pros and cons.
Pros
- Allows homebuyers to purchase property with a minimal downpayment
- Incentivizes lenders to provide reasonable interest rates to homebuyers with small deposits
- The choice to pay the default insurance premiums as a lump sum or through installments
- Helps to ensure market stability by protecting lenders against mortgage default
- Regulated insurance premiums
Cons
- Adds closing cost to homebuyers struggling to afford property in the first place
- The insurance covers the mortgage lender as opposed to the insurance payer
- Mortgage loan insurance is usually non-refundable
- Premiums added to the mortgage itself incur additional interest
Watch out!
Remember that mortgage loan insurance does not insure you, the borrower, from defaulting on your mortgage. It provides your mortgage provider with insurance coverage in case you default on your loan which will still put you at risk of losing your property.
How much is mortgage loan insurance?
Just like all insurance premiums, the cost of mortgage loan insurance is decided by different variables. However, unlike most, mortgage loan insurance premium rates are widely published making it fairly simple to calculate your cost.
The table below shows the premium rate (%) applied to your overall outstanding loan, depending on the loan-to-value (LTV) ratio of your mortgage. Meaning, that if you place a 5% down payment on your property, your LTV would be 95% and the premium rate applied to your outstanding mortgage would equal 4%.
| Loan-To-Value (LTV) Ratio | Mortgage Loan Insurance Premium Rate |
|---|---|
| Up to 65% | 0.60% |
| 65% to 75% | 1.70% |
| 75% to 80% | 2.40% |
| 80% to 85% | 2.80% |
| 85% to 90% | 3.10% |
| 90% to 95% | 4.00% |
Example Mortgage Loan Insurance Cost Calculation
If you buy a home valued at $450,000 with a down payment of $54,000 (12%), your LTV ratio will be 88%. With an LTV ratio of 88%, your mortgage loan insurance premium rate will be 3.10% of the total outstanding mortgage of $396,000, meaning that your insurance premium will total $12,276.
Mortgage loan insurance calculators
Mortgage loan insurance calculators, also known as mortgage default insurance calculators, are excellent tools devised to help homebuyers consider the cost of mortgage loan insurance and evaluate how much property they can afford.
You can easily compare premiums by using HelloSafe’s mortgage loan insurance calculator. It's online, simple, and free to use.
Mortgage loan insurance vs mortgage protection insurance
Due to the similarity in names, mortgage loan insurance is commonly mistaken for mortgage protection insurance. Unfortunately, this can cause substantial confusion to home buyers when looking for adequate cover since mortgage loan insurance only covers the lender, whereas mortgage protection insurance exists to cover the borrower.
The table below should shed further light on the difference between mortgage loan insurance and private mortgage protection insurance that can be bought by consumers from most Canadian providers.
| Conditions | Mortgage Loan Insurance | Mortgage Protection Insurance |
|---|---|---|
| Who organizes the purchase of the insurance? | The mortgage provider (aka lender) | Homebuyers |
| Who does the insurance cover? | The mortgage provider (aka lender) | The borrowers and co-borrowers listed on the mortgage |
| Who covers the cost of the insurance premiums? | The borrower will pay the insurance premiums | The borrower and named insured |
| How often are the premiums paid? | The premiums can be paid upfront or be added to the life of the mortgage | Covers the borrower if they cannot pay their mortgage due to an insurable event |
| What does the insurance cover? | Covers the lender in case the borrower defaults on their mortgage | Covers the borrower in the event that they cannot pay their mortgage due to an insurable event |
If you are worried about not being able to pay your mortgage due to an illness, accident, or other natural cause, you should consider private mortgage protection insurance. Use our free comparison tool below to get quotes and compare some of the best mortgage insurance providers in Canada.
Compare mortgage life insurance in seconds
What happens to mortgage loan insurance if you sell your property?
Homeowners may be able to get a full or partial refund on their mortgage loan insurance premiums if they sell their property within 2 years of purchase. If eligible, the amount of the refund would depend on the elapsed time from the original closing date where 6 months, 12 months, and 24 months, where the buyer may receive a refund of 100%, 50%, and 25%, respectively.
If a homeowner is going to sell their property and buy a new home outside of the initial 24-month period, the mortgage insurance may be transferable to the new purchase. It should be noted, however, that no refund will be given in these circumstances.
For the insurance to be transferred to the new property, various criteria need to be met. These include:
- The length of the new mortgage cannot exceed the remaining time left on the initial mortgage
- The loan-to-value (LTV) ratio of the new mortgage has to be equal to, or less than, the previous LTV on the current property
- The amount of your new loan has to be equal to, or less than, the current loan
