How does the mandatory Mortgage Default Insurance (otherwise often called CMHC Insurance) work?
It is a well-known fact that when a borrower is not putting a minimum of 20% of the purchase price as down payment, he/she must purchase the mandatory CMHC backed Mortgage Default Insurance (MDI). Below are some key factors that can help you understand this insurance product a little better.
What is MDI (Mortgage Default Insurance?
This is a Government backed mortgage loan insurance policy that a borrower must purchase when putting less than 20% down payment. The policy protects the bank providing the mortgage loan in the event the borrower is unable to make the mortgage payments and the loan goes into default. Once the bank takes over the property in a Power of Sale and sells it, any shortfall is covered by this insurance policy.
Who provides MDI?
Presently, there are three Institutions that provide the MDI coverage, they are CMHC, SAGEN and Canada Guaranty.
When is the MDI applicable?
The minimum down payment required on a mortgage is 5% of the purchase price. The insurance premium is mandatory for any borrower putting 5-19.99% down payment.
Does the insurance premium vary based on the down payment?
Yes, the MDI varies based on the down payment bracket a borrower falls under. Below is the standard insurance premium Grid
Down Payment (Of the purchase amount) MDI (Of the mortgage amount)
5-9.99% Down 4% Premium on the mortgage amount
10-14.99% Down 3.10% Premium on the mortgage amount
15-19.99% Down 2.80% Premium on the mortgage amount
Do the premiums vary by Institutions?
No, they are set as standard premiums which are the same across the board, regardless of insurance provider or the lender.
Does the MDI policy provide any benefit to the borrower?
Yes, the first benefit to a borrower putting less than 20% down is that this program allows the borrower to enter the home ownership market without needing to save more money for down payment.
Should a borrower face financial hardship due to an unforeseen event and have problems making payments, they can contact their respective Insurer and work on a temporary payment relief plan along with the lender. This would not affect their bureau or create a red mark on their profile. It would not be possible if they had a conventional mortgage without the insurance premium.
In some cases, if the borrower originally had the insurance premium, and they decide to transfer the mortgage, they may be eligible for insured mortgage rate on their new mortgage.
Is it possible to purchase MDI even if someone is putting 20% or more down?
Yes, it is definitely possible. Also, there are some programs, such as for those who are self employed where this is mandatory even with 20% or more down.
We hope this helps shed some light into the often overlooked and less understood mortgage insurance insurance and how it works.