What’s an insured mortgage?
When it comes to mortgages, one of the most confusing concepts is insurance. Not only can you get mortgage life insurance to protect your estate in case you die or become disabled or critically ill, there is also mortgage loan insurance, which is what mortgage brokers and lenders are typically referring to when they talk about insured mortgages.
Contrary to what most people think when they hear the words “insured mortgage”, the insurance is not meant to protect the borrower. In this case, it’s meant to protect the lender, particular in the case of a High Ratio Mortgage, from borrower default and foreclosure.
Mortgage insurance = CMHC insurance
Mortgage loan insurance in Canada is offered exclusively through CMHC, also known as the Canada Mortgage and Housing Corporation. Since mortgage loan insurance is meant to protect the lender in the case of default, they pay the cost of the policy. However, the costs are passed on to you as the borrower.
The amount you’ll pay for an insured mortgage varies with the size of your down payment. Typically, the percentage will fall between 1.80% – 4% of the home’s purchase price. Conveniently for you CMHC provides an easy-to-use calculator for determining your premium.
And while it may not sound like much, those extra percentage points will cost you tens of thousands of dollars. For example, if you were to get a mortgage for a $400 000 house with a down payment of $70 000, you would be looking at an insurance premium of $9240 or 2.8%.
You can pay the mortgage insurance premium up front at the time you secure you mortgage or it can be amortized into the life of the loan.
Are all mortgages insured?
The answer to that is no. Not all mortgages require mortgage default insurance, only those where the down payment is less than 20% of the home’s purchase price. These are often referred to as High Ratio Mortgages. This insurance is not available for homes with purchase prices of $1 million or more, and those properties require minimum down payments of 20%.
Interestingly enough, in many cases you can end up getting a lower interest rate on your mortgage if you put less than 20% down instead of more because then the mortgage will be insured and lenders will consider it less risky.
Are there any mortgage rules that apply to insured mortgages?
In 2018, the federal government made a few changes to the rules affecting insured mortgages.
The biggest of which is the so called Stress Test, where borrowers have to qualify at 2% higher than the actual mortgage. Read more about the Stress Test here.
Should you get an insured mortgage?
For many people, there is no choice to be made. If you can’t afford or wait to save up more than 20% for a down payment, you will be required to get get an insured mortgage by the lender you’re working with.
If you can pay more than 20% up front and avoid CMHC coverage, you won’t have to worry about the insurance premium being added to your mortgage costs, but that isn’t a viable option for everyone.
The good news is that an insured mortgage often has lower interest rates than its uninsured counterpart. Once a mortgage is insured, it remains insured for the life of the loan which benefits the borrower over the long term.
One more thing to consider is if you have high amounts of unsecured debt or high interest debt, it will probably make more sense to focus on paying that off first, making a smaller down payment, and taking the CMHC insurance.