When calculating the cost of a home or real estate investment purchase, many clients ask: is mortgage insurance mandatory in Ontario? The short answer is no, the longer answer is: it depends. There are also three separate types of insurance that need to be considered when buying a home (mortgage life and disability insurance, home/fire insurance, and mortgage default insurance) which commonly confuses people.
Mortgage Loan Insurance (Mortgage Default Insurance)
Mortgage loan insurance protects lenders from specific homebuyers from defaulting on their mortgage payments. In Canada, mortgage loan insurance (also called mortgage default insurance) is required to lower the risk for lenders offering high ratio mortgages.
Banks and lenders typically require a downpayment of 20% or more when purchasing a new home. A 20% downpayment mitigates risk for the lenders in two ways: Firstly, the data suggests that borrowers are more likely to fulfil their payment obligations as they have so much of their own money invested in the home, and second they feel that even if the housing market drops a 20% buffer is enough to keep equity in the home for the borrower throughout the mortgage term (typically 5 years). Borrower’s with 20% down payment typically do NOT require mortgage default insurance.
What is a High-Ratio Mortgage?
A high ratio mortgage is a mortgage loan higher than 80% of the value of the property.
The debt ratio is an important concept to understand when you are wondering is mortgage insurance mandatory in Ontario.
The more money you put down on the home purchase, the lower your debt ratio. For example, if you buy a home for $500,000, and you are able to make a $250,000 down payment, your mortgage debt ratio is 50%. If you make a $50,000 down payment, your ratio is 1:9, or you are owing debt on 90% of the value of the property.
Mortgage Loan Insurance Benefits the Lender
The important thing to note is that mortgage loan insurance benefits the lender. If you are not able to make payments on your mortgage, the insurance policy pays the lender back for the mortgage amount, not you.
And many lenders pass the cost of the insurance on to the homebuyer. So, what gives? Why do you need to pay for something that benefits your mortgage provider?
How does Mortgage default insurance benefit the borrower?
With today’s real estate prices, you may not be able to make a 20% down payment. Mortgage insurance allows you to put a smaller down payment on your home, allowing you access to that dream property you otherwise couldn’t afford. With mortgage loan Insurance, you can make a down payment as low as 5%.
Mortgage Loan Insurance Gives You Access to Lower Mortgage Rates
If your loan is insured, major lenders will give you access to slightly lower rates than you would receive for an uninsured conventional mortgage (20% down). People are often confused by this…Why would someone with 20% down get a higher rate then someone with 5%? The reason is because the borrower with a 5% down payment is purchasing mortgage default insurance for the lender that bank is now issuing a risk free loan. This risk mitigation reduces costs and some of those savings are passed along to the borrower in the form of a lower rate.
Who Provides Mortgage Loan Insurance?
There are three main providers of mortgage loan insurance in Canada: the Canada Mortgage and Housing Corporation (CMHC) – a federal government agency that is the largest mortgage default insurer in Canada), Sagen (formerly Genworth Canada) and Canada Guaranty.
How are Mortgage Loan Insurance Premiums Calculated?
As of the time of writing, the CMHC has the following guidelines around home buying:
- If your home costs $500,000 or less, you need a minimum down payment of 5%.
- If the home costs $500,000 to $1M, you need a minimum down payment of 5% on the first $500,000, and 10% on the remainder.
- The CMHC does not currently provide mortgage loan insurance on a home more than $1M.
Insurance premiums are based on the loan to value ratio, and may be charged in a lump sum, or added to your mortgage and included in monthly payments.
Ontario Mortgage Stress Test Calculator
The mortgage stress test rate (or qualifying rate) is the minimum interest rate that lenders must use to qualify you for a mortgage. If you are deemed able to handle your mortgage payments at the stress test rate or higher, then you are more likely to be approved.
If you’re wondering how much you can afford to pay for a mortgage or rent, the CMCH provides a number of useful tools for homebuyers including a:
- Mortgage calculator that allows you to compare rates, the effect of different payment frequencies, amortization and more.
- Affordability calculator that helps you determine how much of a mortgage you can afford.
- Debt service calculator that helps you determine your monthly mortgage / debt payments to your gross monthly income.
So, Is Mortgage Insurance Mandatory in Ontario?
You will need mortgage loan insurance if your down payment is less than 20% of the value of the property. However, it is available (but not mandatory) on lower ratio mortgages. While mortgage default insurance does not directly benefit you, the buyer, it can help you afford a home that might otherwise have been out of your range under previous rules.
Get the Advantage – Contact HW Advantage When You’re Ready to Purchase a Home or Renew Your Mortgage
At HW Advantage, we’re dedicated to finding you the best mortgage rates and terms available. Our success comes from our service quality, knowledge, and client satisfaction. Unlike the big banks, we’re dedicated to finding you the lowest rate, rather than the rate that brings in the most money. You can see some reviews from satisfied customers on Facebook. Contact us today to finance your new home.