Understanding Canadian Mortgage Insurance
Estimated reading time: 4 minutes
There are several misconceptions regarding the word “insurance.” let’s cover the various meanings in the world of mortgages.
High-Ratio Mortgage Insurance
Also known as CMHC, mortgage default insurance, Portfolio Insurance
In Canada, all Banks must have this insurance on any mortgage they lend on with less than 20% down payment.
It is a one-time premium paid by the borrower (generally included in the mortgage)to the insurance company that insures the lender.
If the borrower ever defaults on the mortgage, the lender gets all their money back.
Three companies in Canada offer this insurance: CMHC, which the Government owns, as well as Genworth and Canada Guaranty.
CMHC insurance is backed 100% by the Canadian Government; the other two are 95% funded by the Government.
This has been a source of discussion recently as CMHC has neared its legal insurable portfolio limit of $600 billion in mortgages.
If your mortgage is insured, what does that mean for you?
Unfortunately, the benefit is to the lender, though, as long as you pay your mortgage, that insurance will never need to be used.
The one advantage to having an insured mortgage is that it is somewhat easier to transfer between lenders.
How to save money with High Ratio Mortgage Insurance?
There is no easy way other than having more of a down payment when you buy.
The premium is based on the percent down you have (LTV is the amount of the mortgage/ the value of the house); see this chart from Genworth (CMHC & Canada Guaranty are the same):
You will notice a couple of things:
ALT-A & Vacation B. Ignore those; those are other programs Genworth offers.
Also, Genworth provides insurance on mortgages with more than 20% down (LTV of less than 80%).
This is generally done in the background by the lender and not charged to the client.
They do this to help them sell off chunks of mortgages to other investors.
If you take a 30-year amortization instead of 25 years, they will add .20% to your premium.
The key takeaway is that if you have 7% down, you pay the same premium as if you had 5%.
You have to get to the next tier to get a reduction, in this example, 10% down.
Mortgage Insurance
Also known as Life Insurance, Mortgage Life Insurance
Mortgage insurance in Canada is purely optional and poorly understood by most.
It covers Life, Disability, and Critical illness coverage for the borrowers on the mortgage.
Most of us have been programmed from buying cars and other merchandise to always say no to insurance.
While taking all those types of insurance can be expensive and redundant, a well-planned insurance package capable of dealing with income loss and or death of one or all borrowers should be part of your financial plan.
Many people don’t like the idea of buying Mortgage Insurance as it is on a reduced balance, and think getting term life insurance (where the amount you agree to insure for in the beginning is paid out when claimed) is the better way to go…I’m not here to argue that.
There are situations where one or the other is superior.
Still, everyone’s situation is different, and one should speak to their Financial Planner and Insurance Broker for a proper review.
In this day and age of changing jobs, relying on your work coverage is poor planning.
Many think having life insurance coverage of 1x their annual salary will be sufficient, and most disability coverage through work is more limited than you may know.
Please take the time to look into disability insurance and critical illness insurance.
Your plan should be to survive one of these tragedies with as little stress as possible for you and your family.
Good article on Critical Illness here
Home Insurance
This insurance covers your home from several things, notably Fire and theft.
If you live in a Condo or Townhome, your strata fee pays for your property to have Fire Insurance Coverage; you only have to cover your contents insurance for theft, etc.
Your lender will most likely only require proof you have fire insurance coverage on your home unless it is a strata property. A few Credit Unions need Earthquake coverage in B.C.
I hope you found this helpful in understanding the various uses of the word “Insurance” in the Mortgage world!
Contributor: Michael Anthony Lloyd is a Mortgage Expert with DLC Canadian Mortgage Experts.
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