[Wealthy1Day]

I'm looking for some clarity on something.

I understand the difference between these types of insurance:
Mortgage Default Insurance (sometimes referred to as high-ratio mortgage insurance) - this protects the lender in case one cannot make mortgage payments.

Mortgage Life Insurance (also referred to as creditor insurance) - insurance that covers the cost of the mortgage and the beneficiary is the lender.

Term Life Insurance - insurance for any set amount on total insurance needs and you choose the beneficiary.

I'm aware that Term Life is definitely a better choice than Mortgage Life insurance. That's not where my issue lies. My question relates to Mortgage Default insurance and whether it can be avoided without a 20% down payment.

I have a copy of Buying Your First Home (a special issue published by Canadian Real Estate Guides) and on page 20 it says this...

"Generally, term life insurance can be 20% to 30% cheaper than traditional high-ratio mortgage insurance" ... "but if you already have a life insurance plan and don't want to add to it, high-ratio mortgage insurance should do the trick"

If one has a term life policy, can you avoid paying mortgage default insurance?

 

[Shayne]

The quick answer is no. With less that 20% down you will incur the cost of the legally required insurance from one of the three insurance providers, CMHC, Genworth or AIG.

You can reduce this premium if you put down as much as possible and take a 25 year amortization.

ie 5% down the premium is 2.75%
10% down the premium is 2%
15% down the premium is 1.75%

You will pay an exta .2% for a 30 year mortgage and an extra .4% for a 35 year mortgage.

If you are hovering around the 85% you may be better off to use a line of credit to top up your down payment and not incur the insurance cost. If a "gift" from an immediate relative can also bring the mortgage to 80% loan to value you should explore that possibility.

Good luck!!

 

[bean438]

Check with some local credit unions. Some waive CHMC insurance with a 15% down payment.

 

[Shayne]

It can't be waived. The Credit Union is picking up the cost for the client. If you are still getting a competitive rate it sounds like a good deal!!

 

[Wealthy1Day]

Thanks to both of you. I was pretty sure such was the case, but what I'm reading seems to contradict itself or is creating a bit of a grey area which I'm sure is black and white.

Currently, I'm looking at around a 15% down payment on my own. I may or may not get some assistance from family (will have to see) so I'm thinking conservatively and assuming I won't be at 20%.

That is a good idea to see if my lender will cover the insurance with a 15% down payment. That would be great. And if not then perhaps I'll be better off using my line of credit. Of course, I hope I can put 20% down. That would be better.

 

[OhGreatGuru]

From the lender's point of view there is quite a difference between mortgage default insurance and term life insurance. The latter only pays if you die. There are all kinds of reasons (short of death) for why you might default on mortgage payments.

 

[Wealthy1Day]

That's what I figured. Nevertheless, I seem to have been reading some material that has been a bit confusing.

I have another question on mortgage default insurance.

If you don't pay insurance if your down payment is 20%, why does CMHC have the following premiums stated on their web site??
Up to and including 65% - 0.50%
Up to and including 75% - 0.65%
Up to and including 80% - 1.00%

 

[Shayne]

Some lenders choose to insure all of their mortgages. As far as I know none of them pass the insurance fees on to the borrowers if they put 20% down.

 

[Wealthy1Day]

That's good to know. Although at a lower %, I'd hate to put down 20% only to learn that I'd still have to pay insurance.