Mortgage Insurance

Few people have the resources to pay outright for their new home. The vast majority needs to borrow money to help finance their purchase and will go directly to a financial institution such as a bank, trust company, credit union or caisse populaire, or they may work with a mortgage broker who will arrange a loan for them.

Prior to 1954, mortgage lending was restricted to a maximum of 75% of the value of a property, which meant that purchasers had to pay a minimum of 25% of the value directly from their own assets-the downpayment.

The National Housing Act (the NHA) of 1954 introduced mortgage default insurance for loans of 75% or more of the home's value, referred to high ratio mortgages. This Act introduced greater stability in the lending market, opened the door to more funding for mortgages and was a major step forward in providing greater opportunities for homeownership for Canadians. For home buyers, this meant being able to purchase a home and start building equity before they accumulated a 25% downpayment.

The process of getting mortgage insurance is easy and straightforward. After your lender has approved your mortgage in principle, they will forward an application for insurance to a mortgage insurer. This is done whenever the mortgage loan is 75% or more of the value of the home you want to buy. With today's computerized systems, applications for insurance can be processed and approved within minutes, or it may take longer if personal follow-up is required.

Home buyers pay a small processing, or underwriting, fee for the mortgage insurance application, which may vary according to the work involved. In addition, you are also required to pay an insurance premium. The rate is calculated as a percentage of the mortgage and depends on the size of your downpayment; typically rates range from 0.5% to 3.75% of the mortgage amount. The premium can be paid as a lump sum upfront, or it can be added to your mortgage and incorporated into your monthly payments.

Recently, mortgage insurance has become portable. If you sell your home and transfer your mortgage to your new home, which is a common option offered by lenders, the mortgage insurance can be transferred as well. The insurance premium on the mortgage for your new home may be waived or offered at a very reduced rate, depending on the size of your new mortgage, the loan-to-value ratio and other factors.

Source: Canadian Home Builders' Association