How does Mortgage Loan Insurance Really Work in Ontario?

When you buy a home in Ontario, you would be required to pay a down payment of at least 20% if you wish to avoid paying additional costs.

If you can only pay less than 20%, you will need to get mortgage loan insurance as a requirement by the lender to protect against borrower default.

Buying a home is a common dream of Canadians, as evidenced by the country’s high rate of home ownership. If one of your goals is to be a homeowner, you must learn about down-payment requirements, lender rates, mortgage types, and mortgage loan insurance.

Read on to learn everything you need to know and how mortgage loan insurance works in Ontario. You can also compare mortgage loan insurance products to get the best protection for your mortgage.

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What is Mortgage loan insurance: How does it work?

In Ontario, buying a house valued at $500,000 or less with only 5% as your down payment is entirely possible. It makes it easier for an aspiring homeowner to buy a house. Saving for a down payment to purchase a house can be challenging due to the higher cost of living and other expenses.

If you wish to follow this path to homeownership, your first step is to secure a mortgage. If you are approved by a lender, you will be required to buy a mortgage loan insurance policy. It is also called mortgage default insurance.

Lenders require this type of insurance coverage for mortgages with less than 20% down payment because they are considered high-ratio mortgages with higher default risk.

In Ontario, you can buy mortgage loan insurance only from 3 accredited companies – Sagen, Canada Guaranty, and Canada Mortgage & Housing Corporation (CMHC).

Borrowers don’t deal directly with the mortgage insurance company. Instead, your lender will apply for mortgage loan insurance coverage on your behalf.

Benefits of Mortgage Loan Insurance

The #1 advantage of mortgage loan insurance is that it helps you buy a home much sooner.

With a lower down payment, you can buy a house now rather than wait for a few more years or until you save enough for a 20% down payment.

Of course, real estate prices may be significantly higher in 2 or 3 years, making it more difficult to save enough for a down-payment.

Mortgage loan insurance lets you buy a home for as little as 5% of the total purchase price so you can move in and stop paying rent.

With mortgage loan insurance protection, lenders are more confident about providing funds for home acquisition as it protects them from default.

Furthermore, borrowers can get competitive mortgage interest rates for insured mortgages because of lower risks to the lenders.

Cons of Mortgage Loan Insurance

One of the main disadvantages of mortgage loan insurance is the cost. It is added to your monthly mortgage cost. This means you pay interest on the loan amount plus mortgage loan insurance for the duration of the mortgage.

As mortgage insurance premiums are added to the mortgage amount, it also reduces your equity.

In Ontario, Quebec, Manitoba, and Saskatchewan, provincial sales tax is applied to your insurance premium. You can’t roll over tax with the mortgage loan payments, thus, the tax is paid upfront.

Perhaps the most significant disadvantage of mortgage loan insurance is that it only protects the lender, not the borrower. In case of death, the mortgage insurance benefits is paid directly to the lender.

What is the cost of mortgage loan insurance?

The cost of mortgage default insurance is based on a percentage of your mortgage amount and the size of your down payment. It ranges from 2.8% to 4% of the mortgage amount, depending on loan-to-value ratio. The premium rates are similar in Ontario and throughout Canada.

In effect, the cost of mortgage loan insurance for a mortgage with just 5% down-payment will be higher than one with a down payment of 10%.

For instance, if you buy a house for $400,000 with a 5% down payment, your mortgage amount is $380,000. The mortgage premium of CMHC will be 4% of the mortgage amount, or $15,200. This amount will be added to your mortgage, increasing it to $395,000.

How to get Mortgage Loan Insurance

To get Mortgage Loan Insurance, lenders must pay insurance premiums. This cost is passed on to the borrower. The lender will tell you exactly how much your premium will be when you apply for a mortgage loan.

Without mortgage insurance, borrowers usually pay higher interest rates and additional fees. Overall, the cost of mortgage insurance premiums is offset by savings from lower interest rates.

Here is how mortgage loan insurance works:

Coverage: The insurance protects the lender for a portion of the mortgage loan amount in case the borrower fails to repay the loan. This increases the lenders’ confidence in providing loans even to borrowers who don’t have much equity in their home.

Premiums: The cost of mortgage loan insurance is added to your mortgage loan payments or paid upfront. The premium amount is based on the size of your down payment.

A down payment of 5% to 9% is charged a premium of 4% of the total loan amount.
A down payment of 10% to 14% is charged a premium of 3.1% of the total loan amount.
A down payment of 15% to 19.99% is charged a premium of 2.8% of the total loan amount.

Application: When applying for a mortgage loan with a lender, your financial situation and creditworthiness are evaluated. If you are approved, you will be required to pay for mortgage loan insurance if your down-payment is less than 20%. Your lender will inform you of the price of mortgage loan insurance.

Lender Protection: If you default on your mortgage, the insurer will pay the lender for losses.

Eligibility: Many Canadian banks and lenders work with CMHC for mortgage loan insurance but private mortgage insurance is also available. You must meet lending criteria such as income, debt-to-income ratio, credit score, etc.

Mortgage loan insurance is an important financial tool for both lenders and borrowers. It is an economic safeguard that makes home ownership in Ontario more accessible.

What are other mortgage loan insurance options in Ontario?

We mentioned earlier that mortgage loan insurance is mandatory if your down-payment is less than 20%.

Mortgage life insurance, however, is optional.

If you have a conventional mortgage, your lender could still offer mortgage life insurance as added mortgage protection. A conventional mortgage means your down-payment is 20% or higher.

Many lenders, including Canadian banks, offer their own mortgage life insurance products. It is also available through insurance companies.

Banks adopt a code of conduct wherein they must provide borrowers a separate disclosure statement regarding the cost and the right to cancel it. They also need to get consent before providing a product or service.

Is mortgage life insurance different from mortgage default insurance?

Both products protect the lender from default. But while mortgage default insurance benefits only the lender, some optional mortgage insurance products such as life insurance and disability insurance can also protect the borrower.

Do you need to buy the lender’s mortgage insurance product? Not necessarily. You are not required to buy mortgage life insurance to be approved for a mortgage.

When is mortgage life insurance necessary?

efore buying mortgage life insurance, verify if you have adequate life insurance coverage from your employer or an individual policy that can also cover your mortgage.

Remember that you can sell your house to repay the mortgage. Thus, mortgage life insurance may not be necessary, especially if you have your own life insurance policy or disability and income insurance coverage.

If you and your spouse have incomes that are essential to paying the mortgage, you should consider getting mortgage life insurance.

Mortgage life insurance can pay for your mortgage if you should suddenly die. This helps to avoid passing on the responsibility of paying the mortgage to your spouse or dependents.

Mortgage life insurance benefits

If you buy life insurance for mortgage protection from an insurance company, the amount of coverage does not go down as you pay down your loan.

This means that as your loan amount decreases, the insurance benefit can pay for your mortgage and the remaining benefits can go to your beneficiaries.

Unlike bank mortgage insurance products, your life insurance does not end when you pay off your mortgage. Your finances can be secured for the duration that you choose – 5 years, 10 years, 20 years, or for life.

Most importantly, if you buy mortgage insurance from a lender bank, your premiums will stay level but the amount of benefits decrease with your loan. This makes mortgage life insurance from banks more expensive.

You can buy life insurance for mortgage protection from insurance brokers or insurance companies for more comprehensive protection and lower insurance rates.

Critical Illness and Disability & Income Insurance for Mortgage Protection

Optional mortgage insurance products are life, illness, and disability insurance products. These insurance policies can help pay for your mortgage if you become ill or suffer a disability. They can pay off the balance of your mortgage if you:

Become unemployed;
Suffer an injury or disability;
Become critically ill;
Die

Insurance policies have conditions attached, including a detailed list of illnesses or injuries that are covered or excluded.

If you have term life insurance, the death benefits can pay for your mortgage if you should pass during the term of the policy. Individuals who buy term life insurance to cover a mortgage must choose the term covering the loan’s duration or lifetime coverage for maximum protection.

Understand the terms and conditions of the insurance policy to ensure your mortgage is protected.

Mortgage life insurance vs Life Insurance

When people buy mortgage life insurance, it is for mortgage protection. The insured amount is generally smaller than life insurance. Its main purpose is to cover a mortgage.

Mortgage insurance pays off the balance of a mortgage in the event the borrower dies. The cash benefits are paid to the lender with nothing left for other expenses or your beneficiaries.

In short, a homeowner with a mortgage of $400,000 can buy mortgage life insurance for the same amount, or term life or permanent life insurance for $500,000 or more for enhanced protection.

Term life or permanent life insurance can give better value as the cash benefits in excess of the mortgage balance can be used for other expenses including funeral, mortgage, debts, taxes, etc.

The insured amount does not decrease and can be payable to your designated beneficiaries.

Get the best mortgage protection in Ontario at the right price

You now understand your options regarding mortgage loan insurance products in Ontario. You can begin to consider your choices for mortgage protection that suits your needs.

Mortgage loan insurance is a safety net that can prevent foreclosure of your home if something bad happens.

Don’t let the burden of paying the mortgage create havoc to your family’s finances.

You can explore mortgage loan insurance options to get great coverage at the best price!

Our insurance partners will be happy to send you competitive quotes to help you protect your mortgage and possibly, the financial security of your loved ones!

Fill out our short online form below to receive FREE QUOTES for mortgage life insurance in Ontario.

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