Mortgage insurance and home owner’s insurance are not the same thing. Home owner’s insurance protects the house itself and everything inside of the house should it get damaged. Mortgage insurance protects the bank that gave you the loan and ensures that the loan will be repaid. Read on to find out more about mortgage insurance in Canada…
What happens if you take out a home loan from the bank and your home gets foreclosed? What happens to the rest of mortgage if you lose your job and cannot pay it? With mortgage insurance, you can rest assured the bank will be paid back. However, a higher interest rate may be present on the loan if a defaulted loan should occur. Mortgage insurance is essentially adding more interest onto the home loan.
To get mortgage insurance in Canada you must pay a premium. The premium amount is based on the total value of the house. The more your house costs, the higher the premium will be. If you opt not to get mortgage insurance you could be paying higher interests rates on your home loan. With mortgage insurance you will save more money in the long run. If the loan-to-value ratio is more than 80%, Canadian banks will not loan you the money without the addition of mortgage insurance. A loan-to-value ratio is the mortgage amount divided by the appraised value of the home. The higher the percentage means the risk is higher for the bank and therefore, the interest on the loan will be grater.
According to Canada Mortgage and Housing Corporation, if the loan-to-value ratio is up to 65%, the premium on the total loan will be 0.50% of the mortgage. The highest loan-to-value ratio is 95% which will result in a 2.75% premium. There are easy ways to calculate the cost of mortgage insurance. RateHub will do the work for you when you fill out their online form. For example, if the mortgage on your house costs $100,000 and the down payment is 5% of the total cost, expect to pay $2,613 for mortgage insurance.
Mortgage insurance is required for all mortgages in Canada where the down payment is less than 20% of the total value. Insurance on your mortgage is important to have if you should default on your home owner’s loan. Adding mortgage insurance to your home owner’s loan offers invaluable protection and will keep you from getting deeper into debt. If a problem with finances does arise, keep your mortgage broker informed as they are more than willing to help. They are able to defer your payments should you fall on hard financial times or can extend the repayment period so the monthly costs will be lower.