Mortgage Loan Insurance

High-ratio mortgages (mortgages with less than 20 per cent down payment) must, by law, be insured against default. This type of insurance is offered by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or through an approved private insurer. To find out which companies offer mortgage default insurance, contact FCAC. Your lender will arrange for the purchase of mortgage loan insurance. With mortgage loan insurance, if you default on your mortgage, the lender is paid back by the insurer.

It should be noted that mortgage loan insurance protects the lending institution only. If you default on your mortgage and the proceeds from the sale of your house are not sufficient to pay the outstanding balance on your mortgage, the lending institution will be covered by mortgage loan insurance. Note that, in such a case, you would still lose your house.

Before approving you for mortgage insurance, the mortgage insurer generally makes an assessment of your credit and may require you to pay an application or appraisal fee to process your file and confirm the approval of the mortgage. This fee covers the insurer's costs associated for that assessment. In some cases, the lending institution may pay this fee.

Normally, the down payment you make must come from your own funds. If you borrow the money (from a line of credit, personal loan or credit card), a higher mortgage loan insurance premium applies.

The mortgage loan insurance premium varies according to your down payment. The bigger your down payment, the lower your mortgage loan insurance premium. Typically, mortgage loan insurance premiums vary between 0.5% and 3% of the borrowed amount.

The mortgage loan insurance premium may be paid in cash or added to your mortgage. Although the second option seems interesting, remember that it is more costly, since you would have to pay interest charges on the amount of the premium.

Conventional mortgages (mortgages with at least a 20 per cent down payment) do not, by law, have to be insured. However, there may be instances where mortgage insurance will be required if your loan is considered risky. In this case, the mortgage loan insurance premium will typically be less than 1 per cent of the borrowed amount.

Find out more about the New Concept Mortgages.

Source: FCAC - ACFC
© Copyright.