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MORTGAGE DEFAULT INSURANCE -SIMPLIFIED

Mortgage default insurance policy is paid for by the borrower but it covers the risk of the lender and is between the insurer and the lender.It covers the losses to the lenders that might arise out of default in mortgage payment by the borrower on an insured loan. Please note that in case of default there is NO compensation for the borrower.There are 3 Mortgage Default Insurance companies operating in Canada namely Canada Mortgage and Housing Corporation(CMHC), SAGEN and Canada Guaranty. CMHC is a Crown Corporation while the other two are private entities. Their premiums are more or less similar. OSFI ( Office of Superintendent of Financial Institutions) has restricted the FRFIs from lending over 80% of the loan to value of residential property unless they insure the loan against default with mortgage insurer. So mortgage insurance helps borrowers buy a house when they do not have 20% down payment. The property value or as-improved/renovated value has to be below $1,000,000 million dollars to be eligible for insurance. There are other restrictions like minimum beacon score(600) and maximum amortization 25 years.The minimum down payment to be made is calculated as 5% of the first $ 500,000 and 10% of the amount above $ 500K. The premium is tiered, as the LTV rises so does the premium from a minimum of .60% to 4% at the highest level. The borrower can pay the premium upfront or it can be added to the mortgage amount.If you’re buying in Ontario, Quebec, Manitoba or Saskatchewan, you’ll need to pay provincial sales tax (PST) on your insurance premiums. This cost can’t be added to your mortgage however, and must be paid upfront when you close on your home. Don't forget that you would be paying interest on the premium at the same rate as your mortgage !!! Imagine putting 5% down payment and spend 4% on premium !!! So it is imperative that the borrower weigh the pros and cons before going for High Ratio mortgages.

If the borrower defaults and a Power of Sale is effected then either the property will be sold at a price higher than the outstanding mortgage balance or lower. In the former case the lender will adjust the mortgage amount and residual amount would go to the borrower. In case the proceeds of the sale are less than the outstanding mortgage then lender will make a claim on the insurance company and recover its loss.