What is mortgage insurance?
Although home ownership is a common goal for many Canadians, few people are able to buy their homes outright. Instead, they contribute a percentage of the purchase price and borrow the rest. The portion contributed is called the down payment, and the loan for the remainder of the purchase price usually comes from a mortgage, which is a type of loan secured against the home.
If your down payment is less than 20% of a home’s purchase price, you need mortgage loan insurance, also referred to as mortgage insurance or mortgage default insurance. Lenders require this insurance because a lower down payment means your mortgage is for a higher ratio of your home’s value, and lenders consider borrowers with high ratio mortgages as having a higher risk of default or non-payment.
Why should you get mortgage insurance?
Mortgage insurance offers several benefits to aspiring homeowners. Firstly, it helps you buy a home sooner. Since the average Canadian income hasn’t kept pace with real estate prices, it may take years to save for a 20% down payment. Mortgage loan insurance lets you buy a home with as little as 5% down so you can stop paying rent and start building home equity as a homeowner sooner. Mortgage loan insurance also adds stability to slow economic times, because it helps ensure mortgage funds are available to home buyers. It lowers the risk of lending, and helps borrowers buy homes they wouldn’t qualify for otherwise. In addition, it also helps ensure borrowers get a competitive interest rate on their mortgages. High-ratio mortgages (also called insurance mortgages) often get better rates than uninsured mortgages.
