Part I: Default Loan Insurance

The four main insurance product options you will encounter through the mortgage process are often confused for each other, and not all are relevant for every property owner:

Default Loan Insurance, Home Insurance, Title Insurance and Life/Disability Insurance.  This week we’ll review default loan insurance.

Default Loan Insurance: First time home buyers often buy with a lower down payment.  Default loan insurance is mandatory for purchase of homes with a downpayment of less than 20%. This insurance enables lenders to accept a lower down payment, as low as 5% in some cases, helping those just starting out to enter the housing market.  The lender’s interests are protected if the borrower defaults on default insured loans.  As such, lenders can afford to offer lower interest rates are offered on these mortgages.

Default insurance typically requires a premium, which is based on the size of the loan relative to the property value. The premium can be paid in a single lump sum but is typically added to the mortgage balance.

In Canada, we have three default loan insurers: the Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government, and two private companies: Sagen Financial and Canada Guaranty.

Next week we’ll review Home Insurance and how it factors in the mortgage process.  If you or someone you know has mortgage questions relating to insurance or requires other borrowing information, please give me a call any time.

Adapted from DLC Marketing