Mortgage Insurance What Is?

The lender that is issuing your mortgage will require you to purchase Mortgage Loan Insurance. The purpose of this insurance is to protect the lender in case the mortgage borrower defaults on their loan. It takes effect after a predetermined percentage of the principal balance has been paid off, generally between 80%-90%.

One major source for mortgage insurance is Canada Mortgage and Housing Corporation (CMHC). You can expect your first annual premium within 30 days of obtaining your mortgage and then every six months until you have paid off 20% of your original principle amount. Then, premiums will be due once per year, usually payable at the same time as property tax payments*. When you choose to pay off your mortgage early or switch to a different insurer, such as Genworth Financial Canada, a new premium will be required. If you prove to your lender that you have enough funds for this initial 20% payment, the insurer is waived and the monies are transferred back to you.

*Your mortgage loan insurance premiums may or may not be part of your property tax payments; check with your mortgaging institution to clarify which manner they prefer for remitting these fees.

Mortgage Loan Insurance does not protect you; it protects the lender, in case the borrower defaults on their loan repayment. You should always repay principal amounts before interest (you cannot deduct interest from your taxes like you can do for principle). By paying off additional portions early, you decrease how much interest accumulates over time by reducing each monthly payment; thus making your future installments smaller and easier to afford. If you default, the lender will still recoup this interest over time; but your credit rating would negatively be affected as a result of late payments.

In addition to Mortgage Loan Insurance, you can opt for Private Mortgage Insurance (PMI). This independent insurance protects the borrower if their equity in the house falls below 20%. It is usually required by those who have less than 20-30% down payment on a home purchase, or those that have a marginal credit score that might not meet traditional standards for loans. PMI costs vary depending upon your financial institution and how much of a down payment you have made on the property being mortgaged.

The majority of Canadian lenders require both mortgage loan insurance and private mortgage insurance.

Mortgage Loan Insurance is a requirement on all mortgages issued through the CMHC and most other major Canadian lenders; this insurer uses a simple formula to determine premium amounts. Private Mortgage Insurance is usually only required for less than 20% down payments on home purchase loans, as stated above. Some financial institutions do offer it as an option for those who make larger down payments (more than 25%), or if your credit score is high enough that they feel you don't need extra protection; your lender will be able to tell you whether PMI is available and what qualifications are necessary to obtain it.

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