Understanding Canadian Mortgage Insurance

Are you a prospective buyer looking to apply for a mortgage loan in Canada? One of the additional costs which may be obligatory for some approved candidates is the requirement of paying Private Mortgage Insurance of PMI. Many Canadians are obligated to paying PMI. Therefore, it makes sense to understand whether or not one may have to budget for the additional expense when looking to purchase a Lynx Ridge home. If it will be hard to make a large down payment, more than likely if approved for a mortgage loan, mortgage insurance will also be necessary.

Learn more about PMI, changes to PMI, the purpose of PMI and issues with the current system today.

Private Mortgage Insurance

PMI, or Private Mortgage Insurance, is a standard requirement for those looking to be approved for a conventional home mortgage loan and are not able to put down the amount desired by a lending institution. In Canada, lenders want homeowners to put down 20 per cent or more on a home. The amount was as much as 25 per cent before 2007. Therefore, this change is a positive for today's homebuyers.

However, this can be a formidable amount for some and makes it hard for homeowners to purchase a home without having to be obligated to paying Private Mortgage Insurance. According to a chief financial officer of CMHC, the use of Mortgage insurance makes home ownership accessible to all Canadians with the same interest rates as those who can put down those higher down payments. People who pay less than 20 per cent lock themselves into a high ratio mortgage or CMHC mortgage.

The Purpose of PMI

It is perfectly understandable that lenders want additional security when a homebuyer cannot offer enough of a down payment to establish sufficient equity in a home. PMI is used to create a safeguard for lenders and does little to assist Canadian homeowners. Lenders want to have some protection from possible foreclosures or defaults on mortgage loans. PMI payments go to the lender and are not used toward paying down the mortgage loan. Approved applicants often have to pay the costs of an insurance premium along with their mortgage loan insurance. Options allow individuals to pay this premium as part of monthly payments or as one lump sum.

Some Issues with the System

Mortgage insurance funds can directly benefit the federal government, as the CMHC is a Crown corporation. A significant surplus from mortgage insurance obligations often leads to reviews and outcries from Canadian homeowners. Many argue that the “simple” scheme offered to potential Canadian homeowners does not fairly take into account the needs of homeowners themselves.

Canadians, unlike their American compatriots, do not get to benefit from better creditworthiness, in the form of lower rates. All must pay the same premium. There is little competition in Canada which does not motivate the government to improve policies and offers no real options for prospective homebuyers.

Benefit of PMI

The benefit of home insurance is that individuals who want to purchase a home may put as little as 5 per cent down. It's a straightforward process with two applicable factors when it comes to cost. These factors of determining cost are the total amount of the down payment and the type of mortgage desired. Homeowners looking to be approved for mortgage insurances have three options: CMHC, Genworth and Canada Guaranty. Therefore if one is not approved via CMHC, it is possible to still get a mortgage loan through other companies and underwriters.