Simply stated, if you buy a home and put less than 20% down, your lender will require that your mortgage be insured. There are several companies that offer this coverage- two of the most well known being CMHC and Genworth. The lender sets up the coverage on your behalf, and you reimburse the lender on closing for the premium.

Proponents of the insurance note that insured mortgages often carry with them lower interest rates- as the bank is essentially loaning you your funds with no risk. The downside, of course, is that you must foot the bill for the cost of the policy (plus PST). The lender pays out the premium for you and then claws it back off the top of your mortgage advance on your closing date. This is important for a Buyer to note, as it often means having to come up with a higher than anticipated amount on closing when you meet with your lawyer.

By way of illustration, the registered amount of your mortgage is $400,000. The total premium for the insurance, inclusive of tax, is $15,200 (for arguments sake). Instead of the lender sending the lawyer $400,000 on closing, the lender withholds the full amount of the insurance premium- and sends the lawyer $384,800- leaving you to bridge the gap for the balance due on closing. 

In the event your mortgage goes unpaid and the lender forecloses, any shortfall the lender suffers on account of the default is recoupped via the insurer.

From a practical point of view, the insurance helps ensure that people who need mortgages will qualify- and often at a lesser rate. That said, the cost of the premium needs to be factored into your math when trying to determine the amount you will require on closing to purchase a home. Be sure to discuss this with your lender/broker in detail at the outset, so there are no “surprises” in the days preceding your closing.

If we can assist you in running your numbers, please don’t hesitate to contact us.

Matt Landry