Do you need mortgage insurance for the house you are buying?

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If I take out a mortgage to buy a house, do I need to take out mortgage insurance?

The answer is: it depends.

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In Canada, mortgage insurance is required when your down payment is less than 20 percent of the property’s purchase price. This insurance protects lenders against the risk of a possible default. As a result, they are more willing to approve mortgages for buyers who might not otherwise qualify and this means that mortgage insurance makes buying a home more accessible to buyers.

The Canada Mortgage and Housing Corporation provides mortgage insurance, as do two private mortgage insurers Sagen (formerly Genworth) and Canada Guaranty. CMHC is a public body answerable to Parliament and plays a key role in buying a home for many Canadian residents.

To avoid confusion, it is important to know that mortgage insurance and mortgage life insurance are different things. Mortgage life insurance – also known as mortgage protection – is insurance that pays out the balance of your mortgage if you die with an outstanding balance. This insurance is not mandatory.

The mortgage insurance you inquired about โ€” also known as standard mortgage insurance or mortgage loan insurance โ€” is primarily designed to protect the lender. If a buyer defaults on their mortgage payments, the lender can take possession of the property and sell it. If the sale price of the house does not cover the remaining balance of the mortgage, the insurance protects the lender from loss.

At the same time, mortgage insurance can also be beneficial to you as a buyer, as you can qualify for a mortgage up to 95 percent of the price of a home and still get a reasonable interest rate.

But buying a home with a smaller down payment can come with risks, especially if there’s a chance you won’t be able to pay your monthly mortgage payments or the value of the property would fall below the total amount owed. I highly recommend going through all the numbers and fine print with your mortgage broker and attorney before signing on the dotted line.

If you decide to bid on a home with a down payment of less than 20 percent, the mortgage insurance premium can be added to the amount of the mortgage or paid in one lump sum. The amount is calculated as a percentage of the mortgage and is based on the amount of your down payment.

Keep in mind that some buyers may not qualify for mortgage insurance, based on factors such as the price of the property (it must be less than $1 million), your debt burden, your income, and the amount of closing costs when you take possession of the property.

If you’re considering buying a home and don’t have a 20 percent down payment, your mortgage broker can help you apply for mortgage insurance. Be sure to visit the insurers’ websites for more information on their premium rates and approval criteria.

Joe Richer is a registrar for the Real Estate Council of Ontario (RECO) and a contributor to the Star. Follow him on Twitter: @RECOhelps. This column is for general informational purposes only and is not intended to provide legal or professional advice on real estate transactions.

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