When you buy a home in Ontario there are a few things you need to know about securing a new mortgage. One of which is knowing how much of a down payment you’ll need in order to be able to buy a home, and then how much that mortgage will cost you each month until you own the home. If you’ve been doing your homework on mortgages you might have run across the term “mortgage insurance”, “mortgage default insurance”, “CMHC insurance” or possibly it was just mentioned as “CMHC”. All of these terms essentially mean the same thing and are making reference to mortgage insurance.
What is mortgage insurance?
Mortgage insurance is an add-on fee usually rolled into your regular mortgage payment, that insures payment for the mortgage. So, if for whatever reason you aren’t able to make your mortgage payments at some point, the lender is still going to get paid their money. It’s sort of like car insurance. You hope you never need it but, it covers your mortgage loan instead of your car if something unforeseen were to arise financially.
Does every mortgage need mortgage insurance?
No, not every mortgage needs mortgage insurance. However, any mortgage that is secured with less than a 20% down payment must have mortgage insurance. It’s to protect the lender’s investment in loaning you the money to purchase your home. So, unlike car insurance, which protects you against unforeseen costs from damages, mortgage insurance protects the lender instead of you. Though, you are responsible for paying for it, not the lender.
Why do mortgages with less than 20% down need mortgage insurance?
When thinking about why a loan might need to be insured like your mortgage, we have to keep in mind that for the lender, it’s a business deal or contract of investment. They lend you money, you pay the money back with interest, and that interest is how their business makes money. If you have less than 20% down on the total purchase price of the home, it makes the lender worry about whether you can afford the mortgage payments or not, so they make you purchase insurance so that the lender is not stuck holding the bag if you default on making those payments.
Is mortgage insurance expensive?
Like any insurance, the cost is determined with a specific calculation system. Mortgage insurance is calculated on the overall value of the loan and how much of a down payment you have upfront. The higher your down payment, the lower your mortgage insurance will be. In working with your mortgage broker, you’ll be able to figure out the best down payment amount to minimize the investment in mortgage insurance. More often than not even with higher amounts of mortgage insurance, having the extra cash flow each month typically makes more sense long term than putting down a higher down payment than the other way around. The more liquid cash flow you have each month the easier it will be to make your mortgage payment, pay for groceries, your car payment, and insurance etc. You don’t want to put every free penny into your mortgage and end up house poor not being able to indulge here and there when you want to.
If you’re a first-time home buyer with lots of questions about mortgages and how to buy real estate, that’s fantastic! No, really! It is. You learn by asking a qualified expert, questions, and listening to the answers they give so you can make an informed financial decision like whether or not you should use mortgage insurance, or how much of a down payment you should put down on your next home. In fact, if you’ve got questions, give me, Darren Robinson a call at 705-315-0516. I’m happy to answer any questions you might have about mortgages and other financial investments or insurance as well. That’s why I’m often referred to as a financial partner by my clients, not just an experienced mortgage broker. We all make thousands of financial decisions throughout our lives and it’s nice to rest easy knowing you’ve got someone in your corner that knows you, and your family to help you make those decisions when the time comes.