The Scoop on Mortgage Default Insurance
Unlike Home Insurance, Mortgage Default Insurance can cover your mortgage in case you default on your payments. The two types of insurance are sometimes confused for one another, so as a new homebuyer it's a good idea to know the difference. And since not all mortgages require Mortgage Default Insurance, we'll explain when you may need to pay this extra premium.
News & Views
First a little history. The Canada Mortgage and Housing Corporation (CMHC) was created in 1946 to provide affordable housing for war veterans and to coordinate Canada's national housing program.
Then in 1954, CMHC introduced Mortgage Default Insurance. This insurance allowed Canadians who had less than 25% as a down payment (the amount needed in 1954) to be approved as long as they qualified for the insurance coverage.
Today, when you apply for a mortgage the minimum required to avoid Mortgage Default Insurance is 20% of the purchase price (this changed recently in 2010 when the minimum was lowered from the original 25%). The larger your down payment, the less interest you'll pay over the life of your mortgage.
A mortgage with a down payment less than 20% is considered a high ratio mortgage and must be insured by either CMHC or Genworth Financial. Other circumstances may also require mortgage default insurance and your lender will advise you if your application requires additional coverage.
Your lender will submit your application for approval and once approved, CMHC or Genworth Financial will calculate your insurance premium which is based on how much you have as a down payment as well as the amount you are borrowing. This premium can be paid in a single lump sum or added to your mortgage and included in your payments.
You may decide you want to avoid paying a premium and save up to have the full 20% down payment instead. While Mortgage Default Insurance can be useful in helping you buy a home sooner, it's always smart to make sure you don't over extend yourself. To see an example of the premiums you can check out either CMHC at www.cmhc-schl.gc.ca or Genworth Financial at www.genworth.ca/content/genworth/ca/language.html.
Now that you know the deal, hopefully you'll feel better equipped to purchase your home. Knowledge is the key to making wise financial decisions, so stay tuned for more tips on how to save your money.
Tips:
Not to be confused with Mortgage Default Insurance, which we covered in our news section, when you buy your home you will need Home Insurance to cover your property and contents in case of fire or theft. If you own a car, you've already been through the process of getting coverage at a reasonable price. Here are some tips to help you save and avoid overpaying on the Home Insurance premium.
Many people don't like to haggle over prices and just settle on the price quoted. There are times when you can't negotiate a lower price but when it comes to Home Insurance you do have the ability to pay less. These tips can help you negotiate a lower premium.
Shop around
If you do nothing else, shopping around and getting 3-4 quotes can help you find a better premium than just going with the first company you call. It is even suggested that you do this every year when your policy is up for renewal by getting 2 other quotes as a comparison. Just make sure you are comparing similar policies (that cheaper quote may be too good to be true if they don't provide enough coverage).
The safer your home, the better
Your new home may already have upgraded security equipment, but if not you may want to consider getting a burglar alarm and dead-bolt locks. You can also install smoke and carbon monoxide detectors. Before you buy and install anything, check with your insurance company to find out if they will provide a discount.
Increase your deductible
Often when people get insurance they decide to make their payments on a monthly basis. This covers their yearly premium. To bring this cost down you can increase your deductible. This is the money you pay when you make a claim. Remember though that a higher deductible will reduce your insurance premiums, but if you have a claim you'll need to be prepared to pay your deductible.
Bundle up
A lot of companies offer discounts when you bundle up all your services with just one provider. If you own a car and have Home Insurance, ask if they will provide a discount if you bundle your home and car insurance. Often, an insurance company will discount one or both of your policies.
