Hey everybody! Ryan here!

It's been a little while since I've shared about some of the mortgage "basics", so I'm going to try and get back in the habit. Some of the concepts/terms we talk about can be pretty overwhelming if this is your first time through the process. But not to worry! A big part of our job is to help break these things down into something that's easier to understand. 

Buying your first home is an exciting journey, but it also comes with a lot of new information and decisions. One term you might encounter in the mortgage process is "mortgage default insurance." In this post, we'll break down what it is and why it's sometimes required for first-time home buyers.

What is Mortgage Default Insurance?

Mortgage default insurance, often referred to as CMHC insurance in Canada, is a type of insurance that protects lenders in case the borrower (you) defaults on the mortgage. In essence, it's a safety net for the lender.

Why is it Required?

Down Payment Amount: In Canada, if your down payment is less than 20% of the home's purchase price, you are required to obtain mortgage default insurance. This is known as a high-ratio mortgage. The insurance gives the lender confidence that even if you have a smaller down payment, their investment is protected.

Risk Mitigation: Lenders use mortgage default insurance to manage their risk. When a home buyer has a smaller down payment, there's a higher risk of default. Mortgage default insurance helps mitigate this risk. It can also be used to mitigate other risks such as a rural/remote property location, or borrowers who are self-employed or new to their employment.

Competitive Interest Rates: By obtaining this insurance, you're more likely to qualify for competitive interest rates. Lenders are more willing to offer lower rates when they have the protection of mortgage default insurance.

How Does it Work?

When you purchase mortgage default insurance, you pay a premium. This premium can be added to your mortgage amount and paid off with your regular payments. The insurance premium is calculated based on the size of your down payment and the total mortgage amount.

In the event that you default on your mortgage, the insurance company pays the lender the outstanding balance. It's important to note that this insurance solely protects the lender and not the homeowner.

Tips for First-Time Home Buyers

Budget Wisely: Factor in the cost of mortgage default insurance when budgeting for your first home. The premium can be a substantial amount, so make sure you consider the cost and factor it in when deciding how much you want to put towards your down payment.

Understand Your Responsibilities: While the insurance protects the lender, you're responsible for the premium. Make sure you understand how it will be paid and how it affects your overall mortgage.

Ask Questions: Different insurers offer different programs/options (ask your broker about this), and the premiums vary depending on how much you're putting down (bigger down payment = lower premium) as well as which program you're using (higher-risk insurance programs = higher premium). Make sure to talk over with your mortgage broker what you're paying for and why. 

In summary, mortgage default insurance is a financial tool that enables first-time home buyers to enter the housing market with a smaller down payment. While it's an added cost, it can help you secure a mortgage and enjoy the benefits of homeownership. Make sure to discuss this with your mortgage broker to ensure you fully understand the terms and implications.

If you have any more questions about mortgages or anything else related to your home purchase, book a call any time. We're here to help you navigate the exciting path to homeownership.