How much is home loan insurance?

Are you thinking of becoming a first-time homeowner but don't have enough money in the bank for a 20% down payment? Don't panic, you can still be approved for a mortgage. But, you will need to purchase mortgage loan insurance. If this is the first time you've heard about mortgage loan insurance, you're not alone.

To learn more about what this coverage entails and how much you can anticipate paying in premiums, stick around.

What is mortgage loan insurance?

Mortgage loan insurance, also known as mortgage default insurance, is a type of coverage that protects the interests of mortgage lenders if you, (the borrower), default on your monthly mortgage payments. Rather than being at a loss if you default on your loan amount, your mortgage loan insurance provider will compensate your mortgage lender for their losses.

What is the Canada Mortgage and Housing Corporation?

In Canada, the Canada Mortgage and Housing Corporation (CMHC) is owned by the federal government. This corporation operates with the goal of making housing more accessible and affordable to Canadians. Through this corporation, you'll find numerous financing and loan programs, including mortgage default insurance.

Keep in mind that while there are other mortgage lenders who offer CMHC insurance, not all do or are approved to do so by the National Housing Act (NHA). Here's a closer look at the different types of insured mortgages offered by the mortgage and housing corporation:

CMHC Purchase

As we just mentioned, a CMHC purchase loan is meant for first-time homebuyers in Canada who wish to purchase a home but who have an under 20% down payment.

CMHC Improvement

With CMHC improvement financing, the government will provide applicants with financing to fund their home renovations or the construction of a new home.

CMHC Newcomers

Newcomers to Canada who do not have a Canadian credit history and wish to purchase a home with a smaller down payment are still eligible for mortgage default insurance from the corporation. To assist, the corporation will examine a letter of recommendation from their home country, a foreign credit report, or payment records to creditors who do not submit to a credit bureau.

CMHC Self-Employed

If you're self-employed and wish to make a home purchase, the corporation will take into account that your income may be lower due to deductions, making it easier for you to qualify for a CMHC mortgage.

MHC Income Property

Lastly, for Canadians looking to purchase an investment property, the CMHC will make it easier for you to qualify for a mortgage loan by considering your rental income when calculating your debt service ratio.

It's important to mention that beyond CMHC insurance, this type of mortgage default insurance is also available through the following private companies:

• Sagen (previously Genworth): Sagen is a private mortgage default insurance company providing mortgage loan insurance, loan servicing, and loan origination.

• Canada Guaranty (previously AIG Canada): Canada Guaranty is one of the leading providers of mortgage default insurance alongside the CMHC. Similarly, Canada Guaranty offers self-employed mortgage insurance and mortgage insurance coverage to those who have unique incomes.

Is mortgage default insurance mandatory in Canada?

Yes, mortgage loan insurance is mandatory for all home buyers who wish to buy a home with a purchase price under $1 million and less than a 20% down payment.

What is the difference between mortgage default insurance and mortgage life insurance?

When talking about CMHC mortgage insurance, we naturally have to mention mortgage life insurance. Although similar to each other, there is a major difference that you should be aware of.

Essentially, while mortgage default insurance is mandatory for high-ratio mortgages, mortgage life insurance is optional. With this coverage, the lender you borrow money from will become the beneficiary in the event you, the borrower, pass away before the remaining mortgage amount is paid off in full.

How much is mortgage insurance?

So, how much will a mortgage insurance premium cost you, and how is it calculated? A CMHC mortgage premium is calculated based on a borrower’s loan-to-value ratio, which is the total mortgage loan divided by the home purchase price. In other words, the lower the down payment, the higher the mortgage default insurance premium.

Now, let's go through an example of how a mortgage default insurance premium is calculated using real numbers. Say the purchase price of your home is $1 million, and you put a minimum down payment amount of 5%. That would mean that your loan-to-value ratio is 95%, with the 5% being your down payment of $50,000 and the remaining 95% being your mortgage loan of ($950,000).

Now, in terms of your insurance premium, you can anticipate paying premium rates anywhere between 2.5% and 5% of your mortgage amount. For example, this would mean that the insurance premium on the total loan is between $23,750 - $47,500, which will be paid through your monthly payments.

For home buyers looking to calculate their mortgage default insurance premium on potential home prices and loan-to-value ratios, you'll be happy to know that you can use an online mortgage insurance calculator at your convenience.

What is the minimum credit score for CMHC insurance?

Similar to how you may not be able to get a personal loan with bad credit, the same can be said when it comes to a mortgage. To successfully apply for a mortgage loan from Canadian lenders with a down payment under 20%, you'll need to have a minimum credit score of 680. If you're applying for a mortgage with a co-signer, they will also require this minimum score.

Unsure what your current credit score is? Get a free credit score check and build your credit with KOHO by opening a virtual credit card with overdraft protection coverage to get one step closer to being a homeowner!

Why is mortgage loan insurance important for home ownership?

If you're currently renting a property in Canada with a decent savings account and have dreams of becoming a homeowner in the future but feel discouraged at the current real estate market in Canada, mortgage protection insurance can help make your dreams a reality without impacting your finances.

Because insured mortgages enable home buyers to purchase a property with less than a 20% down payment, financial institutions are more willing to approve you for your mortgage amount, given that it reduces their overall risk of lending you money in the first place. Keep in mind, however, that there are numerous other fees when you borrow money for a mortgage, including provincial sales tax, legal fees, closing costs, and more that you'll need to factor into your home's purchase price.

How can I qualify for mortgage loan insurance?

To qualify for mortgage default insurance, there are several requirements you'll need to meet, including the following:

• The purchase price of your home must be under $1 million.

• A maximum amortization of 25 years on your mortgage amount.

• A minimum down payment amount of %5.

• A gross debt service ratio that is less than 35%.

• A total debt service ratio that is less than 42%.

• A minimum credit score of 680.

What is the difference between a mortgage and home equity?

The difference between a mortgage vs. home equity is fairly straightforward. While a mortgage is the lump sum of money you borrow from a financial institution to purchase a home, home equity is the difference in the value of your home and the balance you have left on your mortgage.

For example, if your home is valued at $750,000, and you have a remaining loan amount of $500,000, you would have $250,000 in home equity.

What happens with mortgage loan insurance if you move properties?

If, in a couple of years, you want to move out of your first home to purchase a new property or invest in a secondary home, you'll likely need to apply for a new mortgage. Most of the time, your mortgage default insurance will be transferrable to your new loan amount.

However, whether you're eligible to do so will depend on whether you've been making your mortgage payments on time, how much of your loan amount you have left to pay, and your overall financial situation.

How to minimize mortgage default insurance premiums?

The only way to minimize your CMHC insurance premium is to increase your down payment amount. Before considering homeownership, ensure that your plans for spending and saving are aligned with your current financial situation. If you have a Registered Retirement Savings Plan (RRSP), you're also able to borrow money from this account to increase your down payment under the Home Buyers' Plan (HBP) with the condition that you'll pay back the money within 15 years.

How can I get a better mortgage rate?

With mortgage rates still relatively high in Canada, finding an affordable rate may seem like a pipe dream, but it is possible. To increase your chances of better mortgage rates, here's what you need to do:

Build your credit score

It all starts with your credit score. The higher your score is, the more likely you'll be able to qualify for a mortgage at a favourable rate. To do so, you can build credit with a personal loan and practice responsible financial habits that can help eliminate the credit card debt you may have.

Pay off credit card debt

This ties into our next point, paying credit card debt is really the best way to improve your credit score and lower your debt-to-income ratio, which should realistically be under 30%. So, how does paying off a loan credit impact your overall score?

There are two ways that progressively repaying a loan could increase your credit score. The first is that it contributes to your overall credit history, which will show lenders that you have a habit of making on-time payments, which is a major green flag.

Second, when you pay off your loan and lower or entirely eliminate your debts, your credit profile will improve for the better in the long run, making it easier to find a mortgage rate you're comfortable with.

Consider debt consolidation

If you have numerous debts with varying interest rates, you may benefit from debt consolidation. Debt consolidation is when you combine numerous smaller debts into a single loan that has one monthly payment. Not only will this make it easier to stay on top of your debts, but you may also be able to acquire a lower interest rate with your personal loan, which can help you save money over time.

For larger debts, you could also consider a credit repair. Learn more about the difference between credit repair vs. debt consolidation with KOHO!

Save for a larger down payment

It goes without saying that increasing the money paid upfront on your down payment is the best way to get a better mortgage loan. Consider opening a high-interest savings account to grow interest on the money you deposit!

Save with KOHO

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Want to improve your financial literacy? Check out the difference between a personal loan vs. line of credit and how inflation affects credit card debt using our free resource hub that's updated regularly!