All About Mortgage Loan Insurance And Why You Need It

Now that you have an ideal house of your own with a pre-furnished living room and sublime views, you ought to be a happy person. Having fulfilled your dream of owning a house, you must be content and delighted too. Nevertheless, there is a small catch - even after plenty of tightening your belt and saving every penny that you could possibly manage to, you have only been successful in somehow just making the down payment for the dream home to come true. However, you are still fortunate since the Canadian Bank Act permits people buying home for the first time to borrow amounts up to 95 per cent of their buying price provided they have mortgage loan insurance.

What is mortgage loan insurance?

In simple words, mortgage loan insurance denotes the borrower gives a guarantee to the lender stating that if the former fails to pay the mortgage sum, the lender would not be accountable for the remaining amount of the purchase price. In the instance of a first time home owner having not more than 20 per cent deposit, the federal government makes it necessary that the lenders get your mortgage insured by any one of the following three companies - the government owned Canada Mortgage and Housing Corporation (CMHC), wherein the government pledges cent per cent coverage, Genworth Financial or the Canada Guaranty. The last to companies have been vested with powers to provide cover only 90 per cent of the mortgage loan. In case of mortgage loan insurance, the lender usually transfers the costs to the home buyer.

What's the cost?

Many people who are keen to buy their home would be wondering as to what would be the cost of acquiring mortgage loan insurance. Well, the cost is completely conditional on the price of the home you are buying as well as the amount you are giving as down payment. For instance, if you are paying $250,000 for a two-bedroom walk-up and making a down payment of five per cent, i.e. $12,500 on a 35-year mortgage, the mortgage loan insurance provided by the Canada Mortgage and Housing Corporation (CMHC) will cost you approximately $7,500. According to a mortgage broker with Toronto-based firm Invis,  the home buyer has the option to make the entire payment upfront, but when home buyers make a down payment of only five per cent of their purchase price, they do have some reason for doing so. Hence, majority of the home buyers prefer to have the mortgage insurance cost combined with they mortgage installment payments. Therefore, the premiums for a 95 per cent mortgage begins at 2.75 per cent of the value of the loan and increase somewhat based on the duration of the mortgage term.

Can I buy it even if it's not required?

If you are wondering whether you can purchase mortgage loan insurance even if you do not need it now, the answer is a firm 'yes'. In effect, generally most people chose to make a small amount of down payment and buy the mortgage loan insurance. According to mortgage broker, even if people have some additional money, they prefer to keep it with themselves for undertaking any important repair or for emergencies that may arise in the family or to have sufficient money for necessary furnishings even after acquiring the new home.

What is in the fine print?

It may be noted here that the mortgage loan insurance comes under the provisions of the Provincial Sales Tax (PST), but not subject to the Harmonized Sales Tax (HST). In fact, self-employed applicants are required to pay higher premiums since they do not have their annual income validated by any third party. In addition, in case you are purchasing your second home, only the amount that exceeds the first mortgage obtained by you needs to be insured. Although you would be required to pay an additional premium in the event your mortgage is considerably larger, in the end you will find it cheaper to reinsure the total sum.

What is mortgage life insurance?

Apart from the mortgage loan insurance, there is something else called the mortgage life insurance, which very few people are actually aware of. When you go in for the mortgage loan insurance, it is usual that your lender will ask you if you also would like to have a mortgage life insurance. In case, you chose to decline accepting this insurance, your lender might even make it necessary for you to sign a disclaimer. Now, there is no reason to panic over this issue. In fact, the mortgage life insurance is a discretionary product that is intended for paying off the remaining amount of your home loan in case you expired prematurely. In case, you already possess a personal life insurance policy, it is likely that you will not require a mortgage life insurance. However, if you make a down payment of less that 20 per cent of the purchase price of the new home, it is mandatory for you to purchase the mortgage loan insurance.

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