There’s a reason Realtors advise buyers to learn about the entire buying process inside and out, especially the expenses along the way. And that’s because several mandatory costs catch buyers off guard, disrupting even carefully planned budgets. One of these hidden expenses that many homebuyers have no clue about is “mortgage default insurance”. The biggest question on most buyers’ minds is whether everyone has to pay this insurance, and if so, how much it will cost.

Is this question leaving you a bit puzzled as well? Then, let’s dive into this together and learn all about mortgage default insurance before it surprises you.

Is Mortgage Default Insurance a Must for Condo Buyers in Ajax?

Not every home purchase requires mortgage default insurance. In reality, whether you’ll need this mortgage insurance or not depends on your down payment. In Canada, when your down payment is less than 20% of the property’s price, mortgage default insurance becomes mandatory. This rule applies to all properties, including apartments for sale in Ajax.

Let’s break it down with an example. Imagine you’re buying a $600,000 condo in Ajax. If your down payment is $100,000, about 16.67%, you will need mortgage default insurance. But if you can pay $120,000 (20%) or more upfront, you can skip the insurance.

Why is this insurance mandatory for smaller down payments?

Lenders face a higher risk when someone borrows with a low down payment. If the borrower can’t keep up with mortgage payments, the lender could lose a significant chunk of the loan. Mortgage default insurance protects lenders from that risk, giving them peace of mind.

So, here’s the bottom line: you only need mortgage default insurance if your down payment is under 20%.

The Main Providers of Mortgage Default Insurance

In Canada, there are three main providers of mortgage default insurance:

1. Canada Mortgage and Housing Corporation (CMHC)
2. Sagen (Formerly Genworth Canada)
3. Canada Guaranty

All three providers serve the same purpose - to protect lenders if a borrower fails to make mortgage payments. However, the key difference is that CMHC is under government control, while the other two are private companies.

Now you might be wondering - Does one get to choose which insurer to go with when buying condos for sale in Ajax? Well, in most cases, no. It's your lender who decides the insurer, not you. The lender chooses the insurer for you based on their existing partnerships and internal policies. However, the good news is that regardless of the insurer, the rules and rates are regulated. Hence, the insurance cost won’t vary widely between the three providers. 

Breaking Down the Cost of Mortgage Default Insurance in Canada

The mortgage default insurance cost consists of two parts:

• Provincial Sales Tax on the Premium

You must pay the provincial sales tax (PST) immediately at closing. This portion cannot be added to your mortgage and must be covered as part of your closing costs.

• Base Premium Added to Your Mortgage

The base premium is the main cost of mortgage default insurance. You (the borrower) don’t pay this premium upfront. Instead, your lender pays it directly to the insurer on the closing date. The lender then adds this amount to your mortgage principal. You repay the premium gradually over the life of your mortgage through your regular monthly mortgage payments.

However, remember that the insurance premium increases your mortgage amount. For example, if your mortgage is $500,000, and your insurance premium is $15,000, your total mortgage becomes $515,000.

The mortgage default insurance’s premium rate usually ranges from 2.8% to 4%. This percentage depends on your Loan-to-Value (LTV) ratio, which measures how much of the condo’s price you’re financing through your mortgage versus what you’re paying upfront.

The smaller your down payment, the higher your premium rate will be. And the larger your down payment, the lower your premium rate. The lender calculates the insurance premium upfront when funding your mortgage.

Example Based on CMHC Premium Rates

Even though this example uses CMHC rates, Sagen and Canada Guaranty have similar rates. That means your insurance cost will be roughly the same regardless of which insurer covers your mortgage.

In the example above, we assume a 25-year amortisation. However, under the new mortgage rules, some buyers can choose a 30-year amortisation. You can pick a 30-year amortisation only if you’re buying a new construction or qualify as a first-time homebuyer.

If you select a 30-year amortisation, your mortgage default insurance premium increases slightly due to a surcharge of 20 basis points (0.20%) added to the standard rate. For instance, if your base premium is 2.80%, it would increase to 3.0% with the surcharge. If you don’t meet the criteria for a 30-year amortisation, your maximum insured mortgage term remains 25 years.

Mortgage Default Insurance Also Brings Some Perks For You As A Buyer

At first glance, mortgage default insurance might feel like just another expense when you’re buying a condo in Ajax. But here’s the upside - this mortgage default insurance actually opens doors for you. This insurance allows you to buy a condo with as little as 5% down payment. That means you don’t have to wait for years to save a full 20%. On top of that, lenders see mortgages with this default insurance as less risky. Thanks to this, you might even qualify for better interest rates than you would with an uninsured mortgage.

However, there are rules to qualify for the mortgage default insurance. To be eligible, the condo must be your primary residence and cost less than $1.5 million. Your down payment also needs to be under 20%.

So, take some time to weigh the benefits against the cost of the insurance. If you’d rather avoid paying the insurance, you can save up a 20% down payment and skip it entirely. Or, if you want to move in and start building equity sooner, the insurance can make that possible. The choice is yours!