Mortgage Insurance Keeps Owners in their Homes

Posted on April 14, 2010 and updated November 16, 2010 in Insurance Types, Life Insurance Canada News 3 min read
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Mortgage insurance has revolutionized the housing industry, reports the Montreal Gazette.

First introduced 35 years ago, mortgage insurance means that people can own their home for as little as a 5% cash down payment, thanks to a relatively low premium tacked on to the initial value of the loan.

“We just would not see the strong housing market, new and re-sale alike, that we have enjoyed for the past decade without mortgage insurance,” Ajay Soni, senior broker with Invis, a national lender, in Vancouver, told the Gazette.

“Without it, Canadians would still face either the need for 20% down payments or substantial second mortgages at high interest rates. It has shaved years off the time families must scrape and save for a down payment.”

The prevalence of mortgage insurance is extremely widespread. In 2008, 400,000 residential loans were insured. Four out of ten new and resale homes carried mortgage insurance as part of the safety net on the loan. This type of insurance plan is meant to protect the lender in the event that the borrower is unable to pay their mortgage and defaults on the loan.

As an example, suppose you took out a $200,000 mortgage with maybe less than 10% down. If the premium was 2.5%, then you would actually borrow $205,000. Barrowers do not have to do anything to apply for mortgage insurance, it is assessed at the discretion of the lender who will most likely use the borrower’s credit rating, their ability to pay and the value of the property to determine if it is necessary. They will then tack the premium onto the cost of the mortgage.

As a rule, borrowers should be spending no more than 32% of their gross income before taxes on housing costs including property taxes and utilities and no more than 40% of gross income on debt of all kinds including car loans, student loans and credit card debt. The loan can be approved in less than five minutes thanks to technology, so there is no complicated paper work to be filed.

Ironically, despite last year’s recession and the fact that 95% of properties in Canada are insured with mortgage insurance, only 44% went into default by October. That is because the Canadian Mortgage and housing corporation will do everything possible to help you keep your property, such as defer payments or temporarily reduce them.

“We are in the solutions business when it comes to housing,” says Mark McInnis, vice-president underwriting, servicing and policy at CMHC.

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