Understanding Mortgage Insurance: Do You Need It and How Does It Work?

In Canada, mortgage insurance refers to a type of insurance that protects lenders in case a borrower defaults on their mortgage payments. It is required by law for homebuyers who have a down payment of less than 20% of the purchase price of the property. Mortgage insurance is provided by three primary entities in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Canada, and Canada Guaranty.

Here are key points to understand about mortgage insurance in Canada:

1. Purpose: Mortgage insurance protects lenders against the risk of default by borrowers with a high loan-to-value ratio (more than 80%). It enables lenders to offer mortgages with smaller down payments, making homeownership more accessible for many Canadians.
   

2. Premiums: Borrowers are responsible for paying mortgage insurance premiums. These premiums can be paid upfront in a lump sum or added to the mortgage principal and paid over the life of the loan. The amount of the premium depends on the loan-to-value ratio, with higher premiums for smaller down payments.
   

3. Coverage: Mortgage insurance covers the lender, not the borrower. If a borrower defaults on their mortgage, the insurance provider compensates the lender for a portion of the outstanding loan amount. This reduces the lender's financial risk and encourages them to provide mortgages to borrowers with lower down payments.
   

4. Eligibility: To obtain mortgage insurance, borrowers must meet certain eligibility criteria set by the mortgage insurance providers. This typically includes demonstrating sufficient income, good credit history, and meeting specific property and loan requirements.
   

5. Mortgage Default Insurance Providers:

   • Canada Mortgage and Housing Corporation (CMHC): CMHC is a federal government-owned corporation that provides mortgage loan insurance. It is the largest provider of mortgage insurance in Canada.

   • Genworth Canada: Genworth Canada is a private mortgage insurer and provides mortgage default insurance to lenders across Canada.

   • Canada Guaranty: Canada Guaranty is another private mortgage insurance provider approved by the Government of Canada. It offers mortgage insurance to lenders across the country.

Impact on Borrowers: Mortgage insurance allows borrowers to access mortgage financing with a down payment of less than 20%. However, it adds an additional cost to the mortgage in the form of insurance premiums. Borrowers should consider the impact of mortgage insurance on their monthly payments and overall affordability.

When considering a mortgage in Canada, it is advisable to consult with a mortgage broker or lender to understand the specific requirements and implications of mortgage insurance based on your financial situation and loan terms.