There are 2 distinct types of Mortgage insurance. Though both are paid for by the Borrower, one is for the Borrower’s benefit while the other is for the benefit of the Lender.

Insurance in favor of the Borrower is an optional item which provides coverage of your mortgage payments in the event of long-term disability or death. It is typically handled as an ‘add-on sale’ by the lending institution.

In principle this may seem like a good idea but there are two things you need to consider.

First, the purchase of this insurance should not be used by the lender as a basis for approving or disapproving the loan, nor should it affect your interest rate. These items should be determined by creditworthiness, Income coverage and property value. While some lenders may behave as though it is ‘assumed’ that you will buy their proposed coverage, remember that it is absolutely at your discretion and you should be skeptical of any attempt to create linkage.

Secondly, what the lender offers must be compared to buying the same amount of Insurance independently.

Assume for example that your initial Mortgage Principal is $300,000. With traditional Borrower Insurance your premium will be based on $300,000 to cover the worst-case scenario where disaster strikes quickly and the Insurer is liable for the full amount. However, with the passage of time your outstanding balance will reduce, so if the carrier’s liability is limited to the outstanding balance you may find yourself continuing to pay a high premium for an ever-diminishing benefit .

You may  be better served by buying a policy through your regular Insurer whereby the benefit remains constant or, if you prefer, whereby you  annually review the outstanding balance and choose whether to insure a surplus, reduce the premium or re-direct the excess into paying down the mortgage principal.

Lender Insurance is compulsory for non-conventional mortgages that is for 1st Mortgages where the down payment is less than 20% of the Property Value. The threshold used to be 25% but has been reduced.  Most commonly provided by Canada Mortgage and Housing Corp (CMHC) and paid for by the Borrower, Lender Insurance protects the Lender against a Borrower’s failure to pay. Initially introduced as an aid to the first-time buyer and a stimulus to the Housing Sector, its availability was subsequently extended to all Buyers and the original price ceiling was removed. Based on the premise that the Lender bears a greater risk where the Borrower has a lower investment in the property and that the lower the investment the higher the risk,

CMHC Insurances operates on a sliding scale.
Currently with a 5% down payment CMHC Insurance carries a ‘one-time cost’ of 2.75% of the amount borrowed. With a 10% down payment the cost becomes 2% and with a 15% down payment 1.75%, added to the Principal amount of the Mortgage and repaid, with interest over the duration of the loan. Borrowers should note that the Insurance premium is subject to Provincial Sales Tax and that this PST is payable on closing of the transaction.

For example, a Buyer purchasing a $400,000 home with a 10% down payment would be subject to  CMHC Insurance of 2% on the $360,000 balance therefore $7200 would be added to the balance leaving a total of $367,200 to be amortized. In addition to Legal Fees, Land Transfer Tax and any other ‘closing costs’ the Buyer would pay the current CMHC property appraisal fee as well as $576 PST on the CMHC Insurance

Purchasers frequently ask whether they might be better off to eliminate CMHC costs by taking on a 2nd Mortgage ?. Typically the answer is NO, since they will require 15% initial equity in order to qualify for the 2nd Mortgage therefore the fee to be saved is small .Offsetting this, they will bear the costs of registering and ultimately discharging a 2nd Mortgage and will pay a much higher rate for the 2nd Mortgage. The only exception being where the Seller of the property is willing to take back a 2nd Mortgage at a very favorable rate.

Although expensive, this form of insurance does open the doors to home ownership for many people who would otherwise have to rent and allows others to buy a larger home more rapidly. Further, a CMHC Insured Mortgage must contain various provisions for the protection of the Borrower which are usual but not compulsory in other Mortgages. These include limitations on penalties for early discharge and the ability for a subsequent purchaser to “assume” the mortgage with the CMHC Insurance already paid.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.  Please direct your questions to paul@buyerscall.com or to his direct line, 905-607-4400