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Understanding Insured Mortgages: What You Need to Know
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As a prospective homebuyer, it's crucial to grasp the concept of an insured mortgage, often referred to as a 'CMHC' or 'high ratio' mortgage. This type of mortgage is mandatory under federal regulations when your down payment is less than 20% of the home's purchase price, resulting in a Loan-to-Value (LTV) ratio exceeding 80%.
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Typically, the premium, based on your down payment and mortgage size, is added to your mortgage amount (in some provinces, PST is a separate closing cost). This insurance primarily safeguards the lender against default and foreclosure risks, offering you certain advantages, including potentially lower rates and flexible mortgage choices.
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Please note that this type of insurance differs from personal Mortgage Protection Insurance.
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Benefits of an Insured Mortgage:
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Access with a Smaller Down Payment: Allows you to purchase a home with as little as 5% down in some cases, rather than the conventional 20% down payment.
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Potential for Lower Rates: Insured mortgages often come with lower interest rates, coupled with flexible mortgage options.
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Price Restrictions: Homes eligible for insured mortgages are subject to price restrictions based on the down payment size.
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Without mortgage default insurance, lenders may hesitate to approve mortgages with lower down payments, considering them riskier. Therefore, insured mortgages facilitate homeownership with a smaller upfront investment.
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Minimum down payment requirements for mortgage default insurance:
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For homes priced at $500K or less: 5% of the purchase price (mandatory insurance).
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For homes priced between $500K and $999,999: 5% of the first $500K and 10% for the amount exceeding that (also requires insurance).
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For homes priced at $1M or more: A minimum of 20% of the total purchase price (considered a conventional mortgage and no longer requires insurance).
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Premium Examples for Different Home Prices:
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$100K Home Price: Down Payment $5K (5%) = Mortgage $95K; Insurance Premium $3,800.
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$300K Home Price: Down Payment $15K (5%) = Mortgage $285K; Insurance Premium $11,400.
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$600K Home Price: Down Payment $35K (5.83%) = Mortgage $565K; Insurance Premium $22,584.
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$900K Home Price: Down Payment $65K (7.22%) = Mortgage $835K; Insurance Premium $33,372.
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$1M Home Price: Down Payment $200K (20%) = Mortgage $800K; No Insurance Premium Required.
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(Premiums are typically included in your mortgage amount and are subject to change as of June 2023.)
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It's essential to remember that while mortgage default insurance protects the lender, you are still responsible for repaying the mortgage. Failure to make payments could lead to property foreclosure.
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Who Provides Mortgage Default Insurance?
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In Canada, there are currently three major mortgage insurers:
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CMHC (Canadian Mortgage and Housing Corporation): A well-known Crown corporation, often associated with insured mortgages.
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Sagen (formerly Genworth): Another prominent provider of mortgage insurance.
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Canada Guaranty: Offers mortgage insurance services as well.
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Your lender will arrange mortgage insurance through their preferred provider.
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How Are Mortgage Insurance Premiums Paid?​
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Mortgage insurance providers offer two coverage types:
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1. Transactional Insurance (Insured High Ratio Mortgage):
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A one-time premium applied to mortgages with an LTV ratio exceeding 80%.
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Typically added to your mortgage and included in your payments upon mortgage advancement.
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Amounts may vary depending on the provider.
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2. Portfolio Insurance or Bulk Insurance (Insurable Mortgages):
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An option for lenders for mortgages with an LTV of less than 80% or as determined by the lender.
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Paid by the lender, often without borrowers' awareness.
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Frequently used by Monoline Lenders to offer lower mortgage rates.
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Please note that default insurance premiums are not considered mortgage closing costs. Closing costs, such as Land Transfer Tax and Adjustment Costs, must be paid separately by your closing date and cannot be added to your mortgage.
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At MortgagePal, we are well-versed in mortgage regulations and the latest changes. I aim to provide you with the most up-to-date information and tailored solutions for your mortgage needs. Feel free to reach out for expert advice and your best mortgage experience.