What is mortgage insurance and do you need it?

While being a homeowner is a common goal for most Canadians, being able to fork over cash upfront isn’t always easy–that’s where getting a mortgage comes in. 

In Canada, you can secure a conventional mortgage when you offer up a 20% down payment of the property price and your lender will provide 80% of the financing you need to own your dream home. 

However, for those who might find it a little difficult to juggle saving that much with other life expenses, the beauty is, depending on the home’s price point, all you need is a 5% down payment. 

While this might mean not having to save as much to secure conventional mortgage, right off the bat, it does mean that you’ll need to put in a bit more on your monthly payments thanks to mortgage insurance premiums. 

Understanding mortgage insurance

Mortgage insurance–also known as having an insured mortgage or mortgage default insurance–is required to secure the financing, in cases where you can only provide less than 20% for your down payment. 

And, despite what the name might suggest, mortgage insurance isn’t meant to protect you or your home–it protects who you’re borrowing from, in case you stop making payments on your mortgage. 

Overall, mortgage insurance does offer you some flexibility, as this cost can be paid in a lump sum when your mortgage is finalized, or it can be added to your future monthly payments as a premium.

How much do you need to save for a down payment?

In Canada, to qualify for a mortgage, there are a few factors that can affect your ability to secure one, like a good credit score and the amount of money you have available for a down payment. 

How much will mortgage insurance cost and how do you pay? 

According to the Canadian Mortgage and Housing Corporation (CMHC), the calculation of your mortgage insurance premium depends on the amount of the down payment, usually ranging from 0.6% to 4% of the value of the mortgage. 

On an $800,000 home, if you could only put down 10% (or $80,000), your mortgage insurance would be $22,300. While there is an option to pay the cost upfront, most people often build it into their mortgage loan, increasing their monthly payments. 

It’s also important to note that if you’re buying a home in Ontario, Quebec, Saskatchewan, or Manitoba, you pay a provincial sales tax on your mortgage insurance premiums. Unfortunately, this cost can’t be built into your mortgage and instead has to be paid upfront. But, if you purchase an energy-efficient home or renovate your home to become one, you can get a refund of up to 25% of your premiums.

The pros of of mortgage insurance

Unsure if getting an insured mortgage is right for you? If you’re looking to own your dream home sooner than later, it just might be. Not only will you be able to potentially lock down the home you want, you can also start building your equity sooner. 

It’s also good to know that insured mortgages often get better rates than uninsured mortgages. 

The cons of mortgage insurance

Undoubtedly, one of the biggest cons of mortgage insurance is the additional premium cost. Most of the time, buyers opt to add the insured mortgage costs to their mortgage amount, meaning you’ll pay interest on the mortgage and the loan insurance–for the length of your mortgage. 

Should you opt for a conventional mortgage or an insured mortgage?

It comes down to this: the more you can contribute to your down payment, the lower your monthly premiums on any mortgage loan insurance. With interest rates rising, a higher down payment will also save you money in the long term, which can help you pay off your mortgage faster.

To avoid mortgage loan insurance, a 20% down payment is required for all mortgages. If you don’t have the funds upfront to put down 20% but can handle a larger monthly payment, or if you need to reserve funds for home renovations, a lower down payment with mortgage loan insurance may be the best option for you.

However, you never want to be in a tight spot where you’re “house-poor” and have no available cash-flow in case of emergencies. If you’re looking for advice, fill in our quick and easy application and connect with one of our mortgage experts will be happy to help you figure out the options that work for you.