Mortgage 101: Mortgage Default Insurance

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What is mortgage default insurance?

Here’s the deal with mortgage default insurance. It’s an insurance to protect the lender in case you don’t make your mortgage payments and they suffer a loss. And although it’s there for the benefit of the lender, you pay for it.

mortgage default insuranceWhen do you pay for mortgage default insurance?

If your down payment is less than 20% of the purchase price then you pay an insurance premium. Mortgages that are insured are also called high-ratio mortgages.
If you can give at least 20% as a down payment, you will have what is called a conventional mortgage. In this case, mortgage default insurance is generally not required. There are exceptions to this, for example some business for self borrowers who can’t prove their income might pay an insurance premium even though they have more than 20% down payment.

Here’s an example:

Lauren has saved up $50,000 for a down payment on her new home which she has purchased for $300,000. Lauren’s down payment is 16.6% of the purchase price.

$50,000 ÷ $300,000 x 100 = 16.6%
Because Lauren’s down payment is less than 20% of the purchase price, she will need to pay mortgage default insurance.

How much do premiums cost for mortgage default insurance?

The bigger your down payment, the lower your mortgage default insurance premium.  The premium — that is, the cost of mortgage default insurance — will vary depending on the percentage you have as a down payment. Here are the current premiums for various down payment amounts:

Loan to value Standard Premium Down payment
Up to and including 85% 1.75% 15%
Up to and including 90% 2.00% 10%
Up to and including 95% 2.75% 5%

Let’s go back to Lauren to see how the mortgage default insurance premium is calculated

Lauren’s down payment of $50,000 is 16.6% of the $300,000 purchase price of the home. Because her down payment is less than 20%, she will need to get mortgage default insurance.

Lets assume that
• the premium is added to the mortgage of $250,000
• the insurance premium rate is 2%
• the mortgage will be amortized over 25 years

The mortgage default insurance premium will cost $250,000 x 1.75% = $4,375
The total mortgage loan would then be $250,000 + $4,375 = $254,375

Lauren’s mortgage default insurance costs her $4,375 and is added to the mortgage total. It’s worth noting that there is also 8% gst added to the insurance premium which are considered to be part of your closing costs and gets paid at the lawyer’s office.

If you are looking for more information about mortgage default insurance and other costs associated with your mortgage check out some other posts that I’ve written:

What is a conventional mortgage?

What is CMHC mortgage insurance good for?

9 closing costs to consider when buying your first house

 

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chris

Christopher is a second-generation mortgage broker. Following in his dad’s steps, he helps borrowers demystify mortgage financing. Christopher lives in Toronto and when he is not in the office you’ll find him sailing on Lake Ontario.
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