What is Mortgage DEFAULT Insurance and why is it mandatory?

 (CMHC, Genworth, and Canada Guaranty explained)

The subject of mortgage insurance is one of the most common areas of confusion when it comes to mortgages.  It is important for you to know that there are many different types of insurance that are associated with the word “mortgage”.  I’m going to make it very easy for you by explaining the main type of insurance that you need to be aware of – and I am going to call it MORTGAGE DEFAULT INSURANCE.

Mortgage Default Insurance is mandatory if you are getting a HIGH-RATIO MORTGAGE.  Remember, a high-ratio mortgage is a mortgage where you put less than 20% down as a down payment. 

There are many other names for Mortgage Default Insurance – some other common names for it are:

·         Mortgage Lender Insurance

·         Mortgage Loan Insurance

·         Mortgage Insurance

I feel that these terms are too general and they are very often confused with other types of insurance, like mortgage protection insurance and life insurance (I will explain more on these later but do not confuse them with Mortgage Default Insurance).  If you stick with the term MORTGAGE DEFAULT INSURANCE, you should be okay.  Just remember that anytime you hear names like CMHC, Genworth, or Canada Guaranty, you are dealing with the subject of Mortgage Default Insurance.

So why is it mandatory?  Mortgage Default Insurance is not to protect you.  Basically, Mortgage Default Insurance protects the bank if you miss one or more payments.  Missing a payment is called “defaulting”, hence why I like to call it Mortgage Default Insurance.  The bank covers its butt by obtaining mortgage default insurance whenever they lend for a high-ratio mortgage - and then they pass these costs onto you.

How much does it cost?  Premiums for Mortgage Default Insurance vary.  Here’s an example: If you are putting 5% down and you would like a 35 year amortization, the premium is 3.15%.  This means that if the house you want to buy is $500,000, you would subtract the 5% down payment ($25,000) and multiply this number by 3.15% to find out how much you will have to pay for your Mortgage Default Insurance.

$500,000

-$25,000

x 0.0315 (or 3.15%)

$14,962.50

It is important to note that you do not have to pay for your Mortgage Default Insurance immediately/up front.  It can be added to your total loan amount and, thus, into your payments so that you do not really notice the extra amount.  In other words, for a $500,000 house with 5% down, your total loan amount will be $489,962.50. 

$500,000

-$25,000

=$475,000

+$14,962.50

$489,962.50 is your total loan amount