What is Mortgage Default Insurance?

Mortgage Default Insurance, commonly referred to as Mortgage Insurance, allows homebuyers to achieve the dream of homeownership with a low down payment.

There are two types of mortgage options:

• conventional mortgages - on loans with a minimum 20 per cent down payment
• high-ratio mortgages - on loans with a less than 20 per cent down payment

In Canada, mortgage insurance is required federally on high-ratio mortgages – that is, mortgages with a down payment of 20 per cent or less. This insurance, which protects the lender in case of borrower default, gives lenders the flexibility to offer borrowers with low down payments the same low interest rates they would offer to homebuyers with more equity.

Mortgage insurance premiums are based on the amount of the mortgage and although they can be paid in a lump sum upon closing, they are normally added to the mortgage amount and paid over the length of the mortgage.

This insurance is not to be confused with mortgage life insurance which protects homeowners and their families in the event of death or illness.


How mortgage insurance works

If a borrower stops making mortgage payments or breaches the
mortgage contract in some other way, the bank may “enforce”
its mortgage. Normally this means taking legal action to sell the
property and recover what the borrower owes under the
mortgage. The lender will attempt to recover the balance of the
amount borrowed, unpaid interest and legal fees. If the lender
does not recover the full amount owing to it, the mortgage
insurer will pay the lender the amount of the shortfall, subject
to any limits put in place by the insurer. The mortgage insurer
may then take legal action to collect the shortfall from the
borrower, if permitted under applicable law.