Why buying your first home is much like prepping for the arrival of your first child.
“What is mortgage insurance?” Ask this question and you are likely to get a variety of answers. This is because there are different kinds of mortgage insurance. Even though they have similar names. Which is no fun.
Oh, and by the way, a swaddle wrap is used to transform your baby into a little human burrito. It helps them sleep better (apparently), so it really does sound like something you need to invest in.
Ok, so let’s clarify what types of mortgage insurance you will come across and whether you need them:
Mortgage Default Insurance
Mortgage Default Insurance (also known as CMHC Insurance) is required for homeseekers purchasing a home with a down payment of less than 20% of the purchase price.
Such buyers are considered high-risk borrowers (or high-ratio borrowers) because they don't have large equity in their homes and the risk of default is higher. In these circumstances, the lender wants to cover their @ss-ets .
Mortgage default insurance premiums are usually built into your mortgage loan repayments. They are calculated on the size of your down payment – so the smaller your down payment is, the higher the premium will be. Generally, you are looking at a premium somewhere between 2.8% and 4% of your mortgage amount.
And there’s more where that came from, so don’t start that kid’s college fund yet. In Ontario, Quebec, Saskatchewan, and Manitoba, you must pay Provincial Sales Tax (PST) on mortgage default insurance premiums. So, you pay your mortgage, then you pay a premium, then you pay tax on that premium. Life really does seem to get more complicated as you grow up. Also good to note is that PST must be paid upfront, along with your other closing costs, as it cannot be added to your mortgage loan payments.
☞ Sidenote: You can get a refund of up to 25% of your premiums if the home you are purchasing is energy-efficient or if you renovate to make it energy-efficient. You can thank us later. Dark chocolate please.
dontkickthebaby
The most popular mortgage default insurance provider is the Canadian Mortgage and Housing Corporation (CMHC), but you can also use Genworth Financial, and Canada Guaranty.
Although Mortgage Default Insurance is mandatory (much like that glass of water your pregnant partner needs just as you get into bed), there are certain properties that can’t be insured.
unscannable
Mortgage protection insurance (or Mortgage Life Insurance)… and other insurances.
Mortgage protection insurance (or Mortgage Life Insurance) is not required by lenders but is sometimes encouraged. This insurance will pay off your mortgage balance should you or your better half shuffle off this mortal coil. You can sometimes add disability or critical illness coverage.
When you’re 22 you are pretty much immortal. As you get older, you may have to acknowledge that you might, um, actually not be immortal one day. This makes the previously incomprehensible topics of life or disability insurance more topical. Although having this cover may give you peace of mind, there are some cons to mortgage protection insurance. For example, payouts will be made to your lender, not to your family. So while the mortgage will be paid off, your family won’t receive anything.
These policies are also declining payout policies. This means that the amount of coverage declines as you pay down your mortgage. Yes, you heard right. What you will be paid out will become progressively less even though you are still paying the same monthly premium. Sigh.
For this reason, you may find that other, more flexible insurance policies, such as life insurance, critical illness insurance, and disability insurance, are a better fit for your family’s needs.
simba
Let’s swaddle wrap this thing.
We hope this has cleared up some confusion and that you’re feeling reinvigorated for the grand adventure ahead. That’s the homeseeking adventure of course. If you’re having a kid we really wish you the very best. We hear it’s almost as expensive as buying a house.
