Mortgage Default Insurance
For most Canadians, the hardest thing about buying a home – especially the first home – is saving the necessary down payment. Conventional mortgage financing which requires a 20% down payment can put home ownership out of reach for most Canadians.
Fortunately, real relief came in 1954 when the government introduced significant changes to both the National Housing Act and the Bank Act which would increase the supply of mortgage funds available.
By providing default insurance to financial institutions, also know as mortgage loan insurance, home buyers today can arrange financing up to 100% of the property’s value. Lenders refer to this as a 100% Loan-To-Value Ratio. Hence, any financing beyond the conventional 80%, which requires default insurance, is referred to as, high-ratio financing.
There are currently four mortgage insurance companies in Canada:
* Canada Insurance Plan
* Canada Mortgage and Housing Corporation (CMHC)
* Genworth Financial Canada
* PMI Canada (as of April 26, 2007)
The purpose of the insurance offered by these companies is to indemnify the lender in the event of borrower default. However, it is the borrower who pays for the insurance.
When a customer purchases a home with less than a 20% down payment, the Government of Canada requires the mortgage to be insured against default. This type of insurance protects banks and lending institutions from mortgage default.
Who provides default insurance?
This type of insurance is offered by a number of different insurers. As a customer of BMO, insurance would be provided through insurers such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada (GE) or another approved private insurer.
Who pays?
If you require default insurance,Canada Insurance Plan will arrange for you to purchase the mortgage default insurance at the time you take out your mortgage. The cost of the insurance is a one time charge and may be paid at that time or added to your mortgage balance. You would also be charged all applicable government sales taxes, which must be paid up front.
Who is covered?
It is important to understand that the insurance provides protection to the mortgage lending institution only and not to the homeowner.
How is the cost determined?
The cost of default insurance is calculated by multiplying the amount of funds that are being borrowed by the default insurance premium, which typically varies between 0.5% and 6.5%. Premiums vary depending on the amortiozation period of your mortgage, and a ratio based on your mortgage amount and the size of your down payment.If you have further queries please feel free to contact Canada Insurance Plan .
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