Types of mortgage insurance
Mortgage borrower insurance, sometimes referred to as “mortgage insurance,” is different from mortgage default insurance, which is also often referred to as “mortgage insurance.”
Mortgage default insurance protects the lender in the event of default by the borrower, while mortgage borrower insurance protects the borrower. It is designed to relieve the borrower of the need to make mortgage payments to the lender in the event of unforeseen circumstances that prevent the borrower from meeting the terms of the mortgage contract.
Mortgage lenders such as banks, trusts, mortgage companies, credit unions and insurance companies are regulated at the federal or provincial level. Generally speaking, regulations stipulate a maximum loan-to-value ratio for these lenders, which is usually 80%. As a result, institutional lenders cannot normally lend more than 80% of the market value of the property concerned, unless the loan is insured. Mortgage insurance is available for loans representing up to 95% of the property’s value.
Default insurance offers protection to the lender in the event of default on payment by the borrower. It transfers the risk from the mortgage lender to the mortgage insurer. The lender pays a default insurance premium to the insurer to assume the risk of the borrower’s default. The cost of this insurance is normally passed on to the borrower.
When the application is accepted by the insurer, the lending institution will add the amount of the insurance premium to the mortgage loan to be paid by the borrower.
Loan-to-value ratio — Premium on the total loan amount
65% or less ⇒ 0.60%
65.01 to 75% ⇒ 1.70%
75.01 to 80% ⇒ 2.40%
80.01 to 85% ⇒ 2.80%
85.01 to 90% ⇒ 3.10%
90.01 to 95% ⇒ 4.00%
Source: CMHC
When the amount of the premium is added to the mortgage amount, it is not included in the calculation of the loan-to-value ratio. However, gross debt service (GDS) and total debt service (TDS) apply to the entire mortgage payment, including the amount of the insurance premium. In addition, if the premium is added to the mortgage amount, the full face value of the mortgage, including the premium, is insured.
