Whether you’re in the market to purchase a home for the first time, are currently a homeowner, or are looking to refinance your mortgage, you might be wondering whether mortgage insurance is necessary. Even if you’ve purchased homeowner’s insurance, which protects your home and possessions in the event of a disaster, you are still left unprotected should you become unable to make mortgage payments. Keep reading for the low down on mortgage insurance and why you need it!
1. What is mortgage insurance?
There are two main types of mortgage insurance that you need to be aware of as a homeowner or home buyer. Mortgage default insurance protects the lender should you default on your mortgage payment. Mortgage life insurance protects your family should you pass away and leave behind an unpaid mortgage.
Mortgage default insurance is required of all buyers who purchase a house with a down payment of less than 20%. This type of insurance not only protects lenders but allows buyers to purchase a home with a down payment that can be as low as 5%, depending on the purchase price of the house (more on that below), and still receive interest rates similar to those with higher down payments.
As Megan Andrews, Westoba Branch Manager in Winnipeg, explains...
“There is value in having that insurance as it provides an easier way for you to purchase a house.”
Mortgage default insurance is passed on to the buyer from the lender in either a monthly payment added on to your mortgage payments or in a lump sum. The Canada Mortgage and Housing Corporation explains that “the premium is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price).”
Mortgage life insurance (or mortgage protection insurance) protects the family of a homeowner in the instance that the homeowner passes away and leaves their family with the financial burden of an unpaid mortgage. While this can leave you with some peace of mind in knowing that should anything happen to you, your mortgage would be paid in full, this type of insurance is less flexible. Your premiums remain the same over your lifetime, which can make it more affordable, and come to an end when the home is paid off. However, the beneficiary of your mortgage life insurance is your lender, rather than your children or partner, as the payout can only be used to pay off your mortgage.
2. Why do I need it?
No matter what type of mortgage insurance you decide to go with, it’s important to ensure that you, your home, and your family are protected. When your mortgage is the largest financial purchase you’ll likely make in your lifetime, it’s crucial that you protect that investment.
Ultimately, mortgage insurance not only keeps you covered for those unforeseen circumstances we can all count on cropping up when we least expect them, but it also makes homeownership far more accessible, whether you’re a first-time buyer or have a growing family. It’s crucial to consider all the costs that come with buying a home, including legal fees, property taxes, home inspection fees, renovations, maintenance, and utilities. Taking the time to determine not only what you can afford but also how to ensure you can maintain those costs is a healthy financial exercise.
There are other options for insurance that can help to protect your investment in a home, however. Megan Andrews explains, “I would always recommend someone get life, disability, critical illness and loss of employment insurance if they are eligible because most households wouldn’t be able to afford their mortgage in the event that an income is lost.” If you’re not sure which type of insurance makes the most sense for you, we’ve got you covered. Try our new Mortgage Matchmaker Quiz online or speak with an advisor so they can help you make a choice that suits your specific needs and financial situation.
3. How do I qualify for it?
As mentioned above, mortgage default insurance is required when you want to purchase a home with a down payment of less than 20%. In this instance, however, you’re still required to meet a minimum down payment. If the home you want to purchase is less than $500,000, you are required to put up a down payment of 5%. If the home is more than $500,000, your down payment is 5% on the first $500,000 and 10% on the remainder. Homes over $1,000,000 are not eligible for mortgage default insurance. You can get an estimate of your monthly premium on the CMHC website here.
In order to qualify for mortgage protection insurance, the Canada Mortgage and Housing Corporation requires the following:
- Your gross debt service ratio must be less than 35
- Your total debt service ratio must be less than 42
- Your credit score must be at least 680
- You must not have borrowed money for your down payment
Buying a home is an exciting benchmark in our lives and shouldn’t be an experience that leaves you confused or uninformed. Our Mortgage Specialists can help you understand the costs, choices, and best solutions for you and your mortgage, from the type of insurance to expected monthly premiums – we’re here to help! Get in touch with us today to book an appointment – we’re happy to invite you into the branch or meet you where you are.