Any time a down payment for the mortgage is less than 20%, it is required that the mortgage must be insured thru an Insurer. Why does this mortgage need to be insured, who provides this type of insurance, what does this insurance mean, who is the beneficiary, how much does this insurance cost? All these questions need to be addressed when your down payment is less than 20%.
To start, we need to know certain terms.
High Ratio Mortgage – Also known as insured mortgage is any mortgage where the down payment is less than 20%, also defined where the loan to value ratio is more than 80%.
Conventional Mortgage – Any mortgage where the down payment or equity is 20% or more and in other words the loan to value ratio is less than 80%.
There are three companies in Canada that provide this type of insurance, Canada Mortgage Housing Corporation, Canada Capital and Genworth.
The insurance is needed to provide flexibility to buyers in Canada to purchase a property with as little as 5% down payment at the same time the lender is the beneficiary as it protects them in case the borrower defaults on the loan.
The insurance premium is paid once as a lump sum at the time of the purchase of the property and can be added to the mortgage. Premium amount depends upon the down payment and the insurer and can be anywhere from 1.8% to 4.5% of the borrowed amount.
Since insured mortgages are less risk to the lenders, they in turn can offer lesser and more attractive interest rates and mortgage terms.
Another thing to keep in mind is that this insurance is NOT the same as Mortgage Life Insurance. In your life insurance, the beneficiary is the person who you select to be; usually a family member so in case anything happens to you then your family is protected, and your mortgage loan is paid off. But in High Ratio Mortgage Insurance the lender is protected in case the loan defaults.
Written By: Asif Qureshi, Dominion Lending Centres