You have car, health, and maybe even life insurance. Do you need mortgage insurance too? For some, the answer is yes. And since it can increase the total cost of your home, it’s good to read up on it before applying for your first mortgage.

What Is Mortgage Insurance?

Mortgage insurance (also called default insurance) protects financial institutions in the event you aren’t able to keep up with mortgage payments and default on the loan.

This is different from optional mortgage insurance which is offered when taking out or renewing a mortgage. Optional insurance policies are in place to help you continue mortgage payments in the event of job loss, critical illness, or death.

Default insurance is provided by the government-run Canadian Mortgage and Housing Corporation (CMHC), or private providers Sagen and Canada Guaranty.

Who Should Have Mortgage Insurance?

Anyone who makes a downpayment of less than 20% on a home that costs up to $1 million is obligated to purchase mortgage insurance. If the home you have set your sights on is over $1 million, you must make a downpayment of at least 20%, in which case mortgage insurance isn’t needed.

For homes under $1 million, the size of downpayments can vary. If you are buying a home that costs less than $500,000, you need to pay at least 5% down. For homes over $500,000, you are expected to pay 5% down on the first $500,000 and 10% on the remainder of the cost. Remember, mortgage insurance is required for any downpayment less than 20%.

How Much Does Mortgage Insurance Cost?

The cost of mortgage insurance depends on the total value of the home and the down payment you make. Insurance costs can range from 2.8%-4% of your mortgage (the total value of the home minus the down payment).

If you buy a more expensive home and want to port your mortgage, the insurance costs can increase to over 6%.

How Is It Paid?

Mortgage insurance is added to your mortgage and you pay it monthly. However, there are some upfront costs. In Ontario, PST is charged on mortgage insurance and you do have to pay it when you purchase the home. If you think you may need this type of insurance, be sure to factor these costs in when budgeting.

Mortgage Insurance Pros and Cons

Making a downpayment of less than 20% can help you get into the housing market earlier. This way, instead of paying rent, you’ll be building equity in a home.

It can also help you avoid being “house poor.” Many people jump into buying a home with a large downpayment only to find they no longer have adequate savings or money for vacations. Paying less money down initially can ensure you have more liquidity.

However, taking out mortgage insurance means you are paying more for your home in the long run.

You also need to qualify for mortgage insurance. This means one more institution will need to evaluate your application. If you think you may need mortgage insurance, consider getting a pre-approval to save time when you’re ready to buy.

The Takeaway

Mortgage insurance has helped many Canadians purchase their homes sooner and it could do the same for you.

If you’re weighing the pros and cons of making a smaller downpayment on a home, give us a call! We can take a customized look at your financial situation and help you come to a decision that’s right for you.