What is Mortgage Insurance in Canada and Why Do You Need it?

For many Canadians, homeownership is a dream and a goal. There are a few people who buy the property outright, and most take out a mortgage to secure their dream house by making a down payment and borrowing the rest.

What is mortgage insurance?

Mortgage insurance is when the borrower pays the down payment from their savings and takes a loan for the remainder of the purchase by securing the loan against the house. If the borrower makes a down payment of less than 20% of the purchase price, they will need to purchase mortgage insurance or also known as mortgage default insurance. Most lenders are fine with this insurance because the down payment is low, which means the mortgage is a higher ratio of the property’s value. Lenders consider borrowers with a high-ratio mortgage to have a greater risk of default. To find out more information on the mortgage insurance policy, get in touch with Rupinder Rai.

How does mortgage insurance work?

In Canada, you can purchase a home for $500,000 or less by making a 5% down payment. Properties anywhere between the price range of $500,000 to $1,000,000 require a down payment of 5% on the first $500,000 and 10% on the rest. For homes valued above $1,000,000, the down payment must be at least 20% of the purchase price. Borrowers most times will not deal with the insurance company directly, you can apply through an agent. A down payment of less than 20% of the purchase price will be a high-ratio mortgage. Mortgage insurance cost is not free. The lender will pay a premium or mortgage insurance fee as a percentage of the total mortgage amount. The percentage solely depends on the down payment amount.

Should one apply for a mortgage insurance policy?

The simple answer is yes because your loved ones will be taken care of and won’t feel the financial burden of paying off your mortgage in the event of your death. Below mentioned are reasons why one should apply for a mortgage insurance policy:

• A mortgage insurance policy only covers your mortgage: Other life insurance plans pay cash to your beneficiary in the event of your demise, however, mortgage life insurance only reduces your mortgage balance to zero. Your dear will be in a sound financial position without having to pay for the mortgage. But other expenses such as final and funeral expenses are not part of the plan.
• They are comparatively cheaper: The borrower’s most significant after-tax expense is your mortgage. Compared to other loans, mortgage insurance has a lower cost of borrowing. It is ideal for your family to purchase a life insurance plan as it allows them to pay off more expensive debt rather than eradicate your mortgage.
• Mortgage life insurance is flexible: Because the policy is secured against your house, you and your loved ones will have the freedom to make changes. Based on how much time you have left on your mortgage, you can potentially refinance and reduce the monthly payment to an affordable amount.

Over time the coverage of a mortgage insurance policy depreciates

When you purchase a mortgage insurance policy, your payments stay constant for the entirety of the term. However as you slowly continue to pay off your mortgage, the amount your policy pays out reduces. If you decide to make additional payments to your mortgage, you will lose the total coverage amount. Other life insurance plans offer guaranteed coverage or increase over time.

For more information on mortgage insurance or if you’re looking to apply for mortgage insurance in mississauga, contact Rupinder Rai today and schedule a consultation.