For a lot of people the process of obtaining a mortgage can be a bit overwhelming. One of the most important things to us is that our clients complete this process feeling like they were always well informed and had a good understanding of what they were signing up for.
One of the most common things we are seeing with mortgages today is what we refer to as Mortgage Default insurance. Mortgage Default Insurance is coverage that must be placed on any mortgage that has less than a 20% down payment. The premium is based on how much is being put down and calculated using the mortgage amount after down payment is subtracted. See the table below for premium rates.
**Table taken from https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm (CMHC is one company that deals in Mortgage default insurance)
Based on the table above we will calculate the premium for a home with a purchase price of $300000 with a 5% down payment.
$300000(purchase price) – $15000(5% down payment = $285000 x 4% (premium for 5-9.99% down payments) = $11400. This premium gets added right onto the original mortgage amount. In the example this would put the total mortgage amount at $296400.
Mortgage Default insurance is paid by the borrower and is in place to protect the lender should the client default on their mortgage. With less down payment the lender is assuming more risk and that is why the premium is the highest with a smaller down payment. Should the borrower default on their mortgage the mortgage insurer plays a strong roll in payment enforcement and any legal proceedings. In a foreclosure the default insurer will compensate the lender for any shortfall. This does not mean the borrower is off the hook they will still be held accountable to repay this money.
The benefit to borrowers is they are able to buy a home with less down payment. This means less time spent paying someone else’s mortgage in rent while trying to save up a down payment.
Mortgage Default Insurance gives the borrower the ability to invest in their own property sooner than they would be able to otherwise. With housing prices today this opens up the possibility of home ownership to a larger population of people. So while we can see that Mortgage default insurance is not cheap it has proven beneficial to many people wishing to invest in themselves and buy a home.
Jessica Bartolf
Mortgage Associate
Mortgage Alliance Advance Mortgage
