Are you looking to buy your first home? Everyone wishes to buy their own dream house, but many people just can't afford to. A typical mortgage in Canada requires a 20% down payment, but you can bypass that requirement with mortgage insurance!
Mortgage insurance can help you find the house of your dreams, but you need to understand how it works before moving forward. Read on to find out how you can get the home of your dreams without dishing out 20% of the total up front.
Mortgage Insurance 101
When you are looking to buy a house, the down payment you will be able to pay will determine your mortgage options. As most mortgage configurations require 20% as a down payment, this means you will have to either have one-fifth of the total cost at hand, or find some other configuration.
Here is where mortgage insurance comes in. Mortgage insurance protects your lender against loss in case you default. You, as the borrower, can either pay the full down payment or opt to pay a mortgage insurance premium each month which will cover your lender's risk.
For most people, the hardest part about buying their first home is having enough money for the down payment. Thankfully, mortgage insurance will lead to lower down payments. In Canada, any mortgage with less than 20% down payment will often require mortgage insurance.
There are three official mortgage insurance providers in Canada:
Mortgage insurance is still a regular insurance that requires a premium. The lender is responsible for that premium, which is almost always passed on to the borrower.
Mortgage insurance premiums are often incorporated into your monthly mortgage payments. Sometimes you may negotiate for the premium to be paid upfront, much like a down payment, though always smaller.
To qualify for mortgage insurance, you will have to qualify like with any other insurance. The qualification criteria include percentile limits of interest, property, taxes and other metrics on your gross household income. To put it simply, you need to prove to the lender and the insurer that you will be able to shoulder your mortgage insurance. This is done to protect both the lender and insurer in the event of you defaulting on the mortgage.
Mortgage insurance should not be confused with mortgage life insurance. Mortgage insurance refers to mortgage default insurance and protects the lender against loss. Mortgage life insurance is a type of life insurance that triggers if the borrower dies and pays their remaining debt. We will examine mortgage life insurance later in this article, so keep on reading!
Pros and Cons of Mortgage Default Insurance
Obviously, mortgage default insurance gives buyers more flexibility when it comes to buying a new home. With down payments as low as 5%, buyers have a much greater range of houses to browse when relying on mortgage insurance.
With insurance, you can buy homes with lower down payments than normal. This gives people the ability to buy a home faster. Otherwise, they would have to save up for the down payment, during which time their dream house could have been sold.
On the other hand, mortgage insurance raises the total cost of the mortgage and increases the percentage of the down payment decrease. Moreover, mortgage insurance protects the lender and not the borrower.
Many experts advise against taking out a mortgage insurance if you can afford the down payment. However, if you don't have enough saved to pay the full down payment up front, mortgage insurance can help. Mortgage insurance coverage will become lower as your mortgage balance shrinks over the years.
Mortgage insurance payments can be tricky to calculate. If you are in Canada, you can calculate your mortgage payments, your premiums, and more online at Genworth Financial Canada's website.
Down Payment vs. Mortgage Insurance
Saving to pay the full down payment up front is prudent but not always feasible. For example, if prices are rising faster than your savings, you will be hard pressed to catch up.
In some areas, prices are fluctuating a lot and real estate costs might go down. If that is the case, then waiting for your savings to build up may cost you a good deal.
However, if you rely on mortgage default insurance, you can always snatch the best deal as it becomes available, even if you don't have the full down payment ready.
For example, if you are buying a $250K home, your lender will typically ask for a minimum $50K as a down payment. With mortgage default insurance, you can get the same property with just a $12.5K down payment. Since most people will need at least a few years to save for the full $50K, mortgage insurance helps you get ahead of those who go for the full down payment.
Other Types of Mortgage Protection and Property Insurance
We have seen that mortgage default insurance protects the lender in case of the borrower defaulting. But what about mortgage insurance that covers borrowers? This is what is known as mortgage life insurance, or mortgage protection.
Mortgage protection covers the borrower in the event of illness, injury or death, paying for the remaining mortgage. This is often done with a lump sum payment you can use to pay your mortgage. Mortgage protection payments can be used to cover medical expenses should you be forced to default on your mortgage.
There are several life insurance packages that include mortgage protection. These trigger upon the death of the insured and pay a tax-free lump sum to the beneficiary. This is often more than enough to cover an outstanding mortgage.
There is also term life insurance, which covers the insured for a limited period of time. Term life insurance is an inexpensive alternative that can cover mortgage expenses. This type of insurance costs less the earlier you commit to it.
While you are completely bound by your mortgage default insurance, you can always upgrade your term life insurance into a permanent plan, or adjust it according to your needs without having to pay extra fees. On the other hand, switching mortgage insurance lenders will often lead to higher monthly payments.
Future homeowners should be aware of the distinction between mortgage protection insurance and homeowner's insurance. Mortgage protection insurance helps the insured cover their mortgage payments if they become ill or die. Homeowner's insurance protects the property itself from threats.
Homeowner's insurance can protect your property against:
- Fire damage
- Water damage
- Loss of property from theft
- Various other accidents
Many mortgage plans require you to insure the property with a homeowner's insurance. If that is the case, you are fully responsible for paying the monthly fees.
Nevertheless, you will be insuring your own home, so this is something you should be considering anyway. The cost of homeowner's insurance might not be avoided, but it is relatively minor and will help secure your future and the future of your property.
Finding the Right Mortgage Insurance for You
In the end, choosing to pay a 20% down payment, opting for mortgage default insurance, or going down the mortgage protection route, boils down to your own financial and life status.
There are many variables to consider when buying a new home, and mortgage insurance is one of the major things that you will have to deal with. Making an informed decision can save you thousands of dollars and shape your future life.
Mortgage default insurance practically guarantees you a favorable loan to buy a house with lower down payment, but binds you in a way you might want to avoid if you can afford the 20% up-front payment.
Choosing the alternative and insuring yourself against injury or death can also help secure your house and financial future of your family, but this also comes with certain drawbacks and will only trigger if you are hurt.
Learn More about Mortgage Insurance
Finding the best insurance deals for your family can be a tough task. Here at Insurdinary, we empower people to search for the best and lowest insurance rates in Canada. We offer a powerful search engine, along with a host of useful insurance advice and tips that will help you make an informed decision when it comes to finding the best financial or insurance products for you and your loved ones.
If you are seeking to find the best mortgage insurance policy for you, your family, and your property come on in. We will help you find the most beneficial policies to protect your future and upgrade your lifestyle!