Mortgage Insurance

Here is an explanation of mortgage insurance available in Canada.

This is not the same as the mortgage insurance that will pay off your mortgage if you die.

This is insurance that covers the banks for any losses if you stop paying your mortgage and they have to foreclose.

Conventional Mortgages

A conventional mortgage is one that does not need to be insured by the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, or Canada Guarantee. The CMHC is backed by the Canadian government while Genworth and Canada Guarantee are private companies.

To qualify as a conventional mortgage you must have at least 20% of your purchase price available for a downpayment. If you have 20% or more, you are not bound to as many government regulations and have more options for your mortgage. However, since the mortgage will not be insured, you will almost certainly need to have an appraisal done on the property by a licensed appraiser that actually visits the property and comes up with a valuation.

The reason for the appraisal is that the bank needs to know that the property is worth what you are paying for it. If you were to grossly overpay, and couldn’t make your payments, the bank wants to know that they will get their money out of the property if they had to foreclose.

Insured Mortgages

Most first time buyers will only have 5% of the cost of the home to put down as a downpayment. So, they will have to pay for mortgage insurance which usually goes through CMHC. The premiums are going up effective May 1st 2014 so they would have to pay 3.15% of the mortgage amount. For example if they are borrowing $300,000 they would have to pay $9,450 which would be added to their mortgage for a total of $309,450.

Here are the premiums for the different downpayment levels:

  • 20% Downpayment – No insurance necessary in most cases
  • 15% Downpayment – 1.8%
  • 10% Downpayment – 2.4%
  • 5%    Downpayment – 3.15%

CMHC also does an appraisal but they use an automated system called Emili. This database contains millions of properties in Canada and uses many different methods to decide on the value of a house.

Because this is essentially just a computer program, it only takes a matter of hours to get a decision on whether or not Emili will allow the property you want to buy, to be insured. If Emili says no, your lender will have to try to get the insurance though one of the private insurance companies.

If that fails, you would be required to come up with more of a downpayment, or choose another property that is insurable.  However this scenario is very rare. Once the bank or lender decides they want to fund you, insurance is almost always granted.

If you need any more information talk to a Mortgage specialist