Here’s What You Need to Know
Navigating the home-buying process in Ontario can be both exciting and overwhelming. Among the many considerations that come with securing a mortgage is understanding mortgage insurance premiums.
For many homebuyers, especially first-timers, this aspect of the mortgage process may seem complex. However, breaking it down into its core components can clarify what mortgage insurance is, why it’s added to your mortgage, whether it’s required, and why it can be beneficial.
What is Mortgage Insurance Premium?
Mortgage insurance, commonly referred to as mortgage default insurance, is a type of insurance policy designed to protect the lender in case the borrower defaults on their mortgage payments. It’s not to be confused with homeowner’s insurance, which protects the property owner from damages or liabilities.
In Canada, mortgage insurance is typically provided by three main entities:
- Canada Mortgage and Housing Corporation (CMHC): A government-owned corporation offering default insurance.
- Sagen (formerly Genworth Canada): A private provider of mortgage insurance.
- Canada Guaranty: Another private insurer.
The premium for this insurance is calculated as a percentage of the loan amount, based on the size of your down payment. The smaller the down payment, the higher the risk for the lender, and therefore, the higher the premium.
Why is Mortgage Insurance Added to Your Mortgage?
Mortgage default insurance is primarily required for homebuyers making a down payment of less than 20% of the home’s purchase price. In Canada, including Ontario, federal regulations stipulate that borrowers with a down payment below this threshold must obtain mortgage insurance.
For instance:
If you purchase a home for $500,000 with a 10% down payment ($50,000), you’re borrowing $450,000. The insurance premium might range between 2.8% and 4% of the loan amount, depending on the down payment size. In this case, if the premium is 3.1%, it would add approximately $13,950 to your mortgage.
Adding this premium to your mortgage allows you to spread the cost over the life of the loan rather than paying it upfront. While this increases the overall cost of borrowing due to the additional interest accrued on the premium, it makes homeownership more accessible for those who might not otherwise have the funds for a larger down payment.
How is Mortgage Insurance Premium Calculated?
The cost of the mortgage insurance premium depends on the size of the down payment relative to the purchase price. Here’s a typical breakdown:
| Down Payment (% of Purchase Price) | Insurance Premium (% of Loan Amount) |
| 5% – 9.99% | 4.00% |
| 10% – 14.99% | 3.10% |
| 15% – 19.99% | 2.80% |
For homes priced at $500,000 or less, the minimum down payment required is 5%. For homes priced between $500,000 and $1 million, the minimum down payment increases to 5% on the first $500,000 and 10% on the remaining amount.
Example Calculation
Let’s say you’re purchasing a home in Ontario for $600,000:
- Your minimum down payment would be $35,000 ($25,000 on the first $500,000 + $10,000 on the remaining $100,000).
- Your mortgage amount would be $565,000.
- If your insurance premium is 4% (based on a 5% down payment), the premium would amount to $22,600.
This $22,600 could be added to your mortgage, bringing the total amount you’d borrow to $587,600 (before interest).
Why Do You Need Mortgage Insurance?
The primary purpose of mortgage insurance is to mitigate the lender’s risk. When a borrower defaults on their mortgage, it can result in significant financial losses for the lender. Mortgage insurance provides a safety net, ensuring lenders are reimbursed for any shortfall that might arise from the sale of the property in a foreclosure situation.
From a borrower’s perspective, mortgage insurance enables homeownership with a lower down payment. Here’s why you might need it:
- Access to Homeownership: Without mortgage insurance, many Canadians would need to save a minimum 20% down payment, which can take years, especially in markets like Toronto or Ottawa, where home prices are high.
- Competitive Interest Rates: Lenders may offer lower interest rates for insured mortgages, as the insurance reduces their risk.
- Flexible Options for Buyers: Insured mortgages often come with more flexible terms and conditions, making them an appealing choice for first-time buyers or those with limited savings.
Is Mortgage Insurance Required?
In Ontario, as in the rest of Canada, mortgage insurance is required for all borrowers making a down payment of less than 20% of the home’s purchase price. This regulation is governed by the federal government and is designed to promote stability in the housing market.
That said, there are exceptions. You won’t need mortgage insurance if:
- Your down payment is 20% or more.
- You’re purchasing a home priced above $1 million (these properties are ineligible for insured mortgages, and buyers must provide at least 20% down).
- You’re securing a mortgage through a private lender that doesn’t require insurance (though private lending typically comes with higher interest rates).
It’s worth noting that even if it’s not mandatory, some borrowers with a down payment above 20% may still opt for mortgage insurance. Why? Because it can sometimes unlock access to better interest rates, which might save money over the life of the loan.
Pros and Cons of Mortgage Insurance
While mortgage insurance has clear advantages, it’s important to weigh its pros and cons.
Pros:
- Makes homeownership more accessible with a lower down payment.
- Spreads the cost over the life of the mortgage rather than requiring upfront payment.
- Provides lenders with confidence to approve loans for higher-risk borrowers.
- Can lead to lower interest rates on insured mortgages.
Cons:
- Adds to the overall cost of your mortgage through additional premiums and accrued interest.
- Required for buyers with less than a 20% down payment, limiting flexibility in some cases.
- Non-refundable: Once added to your mortgage, you cannot recover the premium even if you refinance or pay off your mortgage early.
How to Minimize or Avoid Mortgage Insurance Costs
If you want to reduce or avoid the cost of mortgage insurance, consider these strategies:
- Save for a Larger Down Payment: A 20% down payment eliminates the need for mortgage insurance entirely.
- Buy Within Your Means: Opt for a home that allows you to make a larger down payment, even if it’s less expensive than your original target.
- Explore Other Financing Options: If possible, consider alternative lenders or borrowing from family for part of your down payment.
Long-Term Implications of Mortgage Premium Insurance
While mortgage premium insurance increases the cost of borrowing, it’s important to view it as a stepping stone to homeownership. For many buyers, the ability to enter the housing market sooner outweighs the added expense.
Additionally, since the premium is amortized over the life of the mortgage, its impact on your monthly payments is relatively small. For example, a $13,950 premium added to a 25-year mortgage with a 5% interest rate would increase your monthly payment by approximately $81.
Final Thoughts
Understanding mortgage insurance premiums is an essential part of the home-buying process in Ontario. While it may seem like an added expense, this insurance plays a critical role in making homeownership achievable for many Canadians. By allowing buyers to enter the market with a smaller down payment, mortgage insurance opens the door to opportunities that might otherwise be out of reach.
Before committing to a mortgage, take time to assess your financial situation, consider the long-term implications of adding the insurance premium to your loan, and explore all available options. Working with a knowledgeable mortgage broker, such as those at UCC Mortgage Co., can help you navigate these decisions, ensuring you make the best choice for your needs and goals. With the right guidance, you can confidently step into homeownership, knowing you’ve made an informed decision.
