Understanding how mortgage loan insurance works.
16 April 2023
Category Blog
16 April 2023,
 0
Understanding how mortgage loan insurance works.

Do you want to become a homeowner faster? 

To be able to take out a mortgage loan to buy a property in Quebec, you must have a down payment of at least 20%. But what if you don’t have this amount? Can you still buy a home? 

While many are fortunate to have saved up at least 20% for their down payment, a large number of buyers, approximately 40%, must take out mortgage loan insurance to be able to buy a property.  

Yes, you can buy a home with a smaller down payment with mortgage loan insurance. 

Here’s everything you need to know about mortgage loan insurance companies in Quebec!

What is mortgage loan insurance?

How mortgage loan insurance works.

Mortgage loan insurance allows you to buy a property faster by investing less than 20% of the purchase price of a property.

When the minimum down payment cannot be met, the Government of Canada and the bank require that you go through a mortgage insurance company. It offers protection to the lender against the borrower’s default. 

This insurance gives access to a reasonable interest rate despite the lack of a down payment. 

With mortgage loan insurance, Quebecers can own a real estate property faster and more easily with a smaller down payment requirement.

Mortgage insurers available in Quebec

Homebuyers with a down payment of less than 20% must get mortgage insurance from a reputable lender. For more flexibility in terms of the amount of the down payment, mortgage insurance is offered only by 3 major companies in Canada as follows:

Canada Mortgage & Housing Corporation

CMHC is the organization responsible for the housing sector across the country and is a recognized mortgage insurer. Created in 1946 following World War II to help veterans find housing, the corporation has continued to evolve to offer its services to the entire population. Its mission is to make housing more affordable with relatively low down payment amounts and interest rates.

Sagen MC (Genworth Financial)

Sagen, formerly known as Genworth Financial, is a leading Fortune 500 insurance company and has been a privately held organization providing loan insurance coverage for over 25 years. Based in Ontario, they work hard to share their knowledge to Canadian home buyers.

CANADA GUARANTY

Canada Guaranty is a 100% Canadian-owned private mortgage insurer operating since 2010. A leader in the private mortgage insurance industry, it provides protection to lenders against borrower default.

In a real estate market experiencing constant changes, they take the confidence of their partners seriously. 

Depending on the company, they have at their disposal different programs to help the Canadian population and newcomers to have the opportunity to own a real estate property.

  • Rental property investment
  • First-time buyers
  • RRSPS
  • Self-employed
  • Second mortgage
  • & many more!

The important thing to remember is that these 3 insurers all offer mortgage loan insurance in case the down payment is lower than 20%.  With these companies, you can obtain a mortgage loan of up to 95% of the purchase price of a property.

Everything you need to know about mortgage insurance eligibility in Quebec!

Who qualifies for mortgage loan insurance?

Now that you have some money to invest and you know which insurers are available to you, it’s time to learn about the terms and conditions that must be met in order to take advantage of mortgage insurance.

  • The property must be located in Canada.
  • The down payment must come from your own pocket, RRSP withdrawals, a family donation, the sale of another property, or a loan secured by your assets.
  • Debt ratios (GDS and TDS) must show you can repay the loan.

Homebuyers who get mortgage default insurance can have a minimum down payment of 5% or less than 20% which is adjusted based on the purchase price of the property.

Here is how the minimum down payment for mortgage default insurance is calculated.

Minimum down payment for mortgage loan insurance

Property Value

Minimum down payment amount

$500,000 and below

5%

$500,00 to $999,999

5% of the first $500,000
10% of the remaining value

Mortgage loan insurance is not available in all cases as there are certain exceptions to the rule.

  • Loan insurance is not offered for properties of $1,000,000 or more.
  • Loan insurance is not available for amortization periods over 25 years.

By working with a mortgage broker, you will be informed of the terms to follow depending on your situation.

Cost of mortgage loan insurance

As I am sure you know, you will have to pay the cost of your mortgage loan insurance in the form of premiums.

You have two options for paying mortgage loan insurance premiums:  

  1. Pay the whole premium in one payment when you set up the mortgage. 
  2. Add the cost of insurance to your mortgage payments and repay insurance costs over the full amortization period.

You should also know that you also have Quebec sales taxes (QST) to pay when you take out the loan.

Even if you opt for the second payment option, it is not possible to finance the taxes on your loan, everything is payable immediately!

How much does mortgage loan insurance cost in Quebec?

The loan insurance premium is based on the loan-to-value ratio. That is, the greater the difference between the amount of the down payment and the value of the property, the higher the interest rate for the insurance premium. 

To demonstrate the financial impact of the premium based on different property values ​​and down payment, here are some examples of calculating the cost of loan insurance.

Typical cost of mortgage loan insurance
Property value$425,000$425,000$750,000$750,000
Down payment5%10%7%10%
Amount of the down-payment$21,250$42,500$52,500$75,000
Interest rate5.4%
Amortization
period		25 years
Insurance premium rate4%3.10%4%3.10%
Insurance cost $16,150$11,857$27,900$20,925

At the end of the day, it cannot be denied that the amount of the premium to be paid is considerable!

On the other hand, it is sometimes a good step to get mortgage loan insurance to buy a property now than wait several more years to save for the 20% down payment.

Is it possible to minimize insurance costs?

Save on mortgage loan insurance.

Indeed, it is possible to reduce the associated costs, but only if you can afford it. In order to reduce the loan insurance premium, there are two ways to achieve this:

  • Maximize your down payment. If you have savings left, it might be a good idea to use it to increase your down payment. It is also possible to find other sources of funding from RRSPs, your family, etc.
  • Decrease the amortization period, as it affects the premium amount.

In real estate, the needs of each buyer are different and so is the size of the portfolio. It is better to call on the services of a professional to know your best option after an evaluation of your situation.

How to qualify for mortgage loan insurance?

The goal of applying for mortgage loan insurance is to buy a home with less than 20% down payment which is the conventional mortgage.

But not everyone is eligible. To qualify for CMHC, you must:

  • Have a minimum credit score of 680;
  • The cash for your down payment must come from your own funds and not borrowed from lenders. It can be obtained as a donation or gift from relatives.
  • Your Gross Debt Service Ratio is not below 35;
  • The Total Debt Service Ratio is not below 42.

Get advice from a mortgage broker for the purchase of a property

Find a mortgage broker to help you buy your home.

Despite the costs associated with mortgage loan insurance, you can come out on top with this investment.

In certain situations, it is profitable or makes good sense to buy a house now than keep waiting for years while you try to save more for your down payment.  Real estate prices increase year-by-year and the cost of home ownership could be more expensive in a few more years.

By taking advantage of mortgage loan insurance, you can buy your dream home sooner rather than later!

If you have questions or want to know your options for buying a property, an experienced mortgage broker is the best professional to consult.

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