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Mortgage Default Insurance

Mortgage default insurance

If the mortgage loan represents more than 80% of the value of the property, lenders may be legally required to take out mortgage insurance to protect themselves against certain risks, particularly those arising from payment defaults. Mortgage insurance therefore enables you to acquire a property with a smaller down payment.

When they deem it to be appropriate, lenders  can take out mortgage insurance even if the loan represents less than 80% of the property’s value.

This insurance is for the sole benefit of the lender, and does not reduce your obligations under the loan and the mortgage. To obtain this mortgage insurance, the lender  must pay a premium to a loan insurer. This document explains how the premium for a loan is calculated. You will have to reimburse the lender for the amount of the premium. There are two ways to pay the premium:

  • You can pay it before the loan is disbursed.
  • It can be added to your loan amount. It would then be added to your payments.

The mortgage insurance premium corresponds to a percentage of the total loan amount. This percentage is based on the size of the down payment (loan-to-value ratio or “LTV ratio”). The smaller the down payment is, the higher the percentage used to calculate the premium will be.

In some provinces, (Quebec, Ontario and Saskatchewan), you must pay a provincial sales tax on the premium. Unlike the amount of the premium, the tax amount cannot be financed. It must be paid to the lender before the loan is disbursed.

Premiums are calculated as follows:

  • Method used when granting a new loan

Amount of mortgage loan multiplied by premium rate = premium amount

If your loan is divided into several portions, the premium rate will only be applied to the total loan amount.

  • Loans eligible for transfer of the insurance to a new property

In certain cases, mortgage insurance taken out on a property’s financing can be transferred to financing for another property. For such loans eligible for transfer, the premium for the new property may be reduced or even eliminated.

Factors that may affect the premium calculation:

  • The amortization period for the new loan
  • The loan-to-value ratio (LTV ratio) of the new loan
  • The amount of the new loan

You can consult the premium rates of the loan insurer and other information by clicking on the following links: