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If you have less than a 20% down payment, it's automatically an insured mortgage. Here's what that means for you.
An insured mortgage (often referred to as a high-ratio mortgage) is one that is covered by mortgage default insurance (which is different than private Mortgage Protection Insurance).
This type of insurance is paid by you, the borrower, to protect the lender against default and foreclosure. It's automatically applied to mortgages with less than 20% down payment (a Loan-to-Value (LTV) greater than 80%), though it also may be applied for unique situations, as well.
In the event of defaulting on your mortgage, you would still be on the hook for the loan if you can't pay, and you could lose the property through foreclosure. If the worst happens, the lender sells the property to recoup its money and the insurer compensates them for any principal shortfall, thereby lowering the lender's risk exposure for the loan and making it more 'secure.'
Without mortgage default insurance, the lender wouldn't consider taking on these 'riskier' mortgages — so it helps them offer more mortgages to more people. In fact, you can possibly get a mortgage with only a 5% down payment with this type of insurance.
The added security of the default insurance allows lenders to offer lower rates or better mortgage options despite the lower amount of down payment (such as longer terms or pre-payment privileges). Please note that recent federal government changes mean there are now greater restrictions on what kinds of mortgages can be insured, depending on the provider.
Currently, there are three mortgage insurers in Canada:
Your lender will arrange for the purchase of your mortgage insurance with the provider they use.
The above providers offer two types of mortgage insurance coverage:
The rules around mortgages, insured mortgages — and even affording a mortgage — are subject to change.
In fact, there have been a number of changes in the past few years, such as in 2016 (Confused By Your Rate Options?), 2020 (CMHC Tightens Rules), 2021 (CMHC Loosens Rules) and as well in June 2021, the tougher stress-test affordability rules set out by the federal government.
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