A question I often get asked as a mortgage broker in Toronto and Brampton is “What is mortgage default insurance?” Before I give the answer, let me first explain the two types of mortgages.
There are two types of mortgages and the amount of money you are able to put towards a down payment is the way it is determined.
Conventional mortgages are loans where the borrower places a down payment of 20% or more of the purchase price on a home. The alternative is a high ratio mortgage when a homebuyer has a smaller down payment of less than 20% of the negotiated selling price.
In Canada, purchasers with a high ratio mortgage which is a higher risk mortgage are required to have mortgage default insurance. What mortgage default insurance does is protect the lender if for some reason the borrower defaults on their mortgage. Lenders then have the flexibility to offer the same low interest rates they would offer homeowners with more equity. Premiums are calculated on the amount of the loan and can be bundled with the mortgage and paid in full at closing. Generally they are added to the monthly mortgage payment and paid out over the length of the mortgage. Mortgage default insurance should not be confused with mortgage life insurance which protects homeowners and their families in the event of death or illness. While mortgage life insurance is optional if you have a high ratio mortgage it’s required to protect lenders when homebuyers with smaller down payments have less “skin” in the game.
Prospective homebuyers might want to try to scrape together the largest down payment they possibly can which will save them money over the term of their mortgage.
A Toronto mortgage broker like myself can advise you on these and other aspects of mortgages after all we work for you to get the mortgage product that suits you. I work hard to find the best rate and terms for my clients. Contact me to sit down and discuss all your mortgage options and questions.
