Private Mortgage Insurance (PMI) is a form of insurance that protects the lender against loss in case you default on your mortgage payments. If something were to happen and you lost your house because of illness or loss of job, a PMI won’t pay the mortgage on your behalf. Read on to learn more about getting private mortgage insurance in Canada.
Buying a house is never a 100% seamless process, regardless of where you find yourself in the world. It’s no different in Canada either. Homeownership comes with costs that are typically difficult to be paid upfront and in full by the great majority of home buyers.
This is where the option of getting a mortgage comes in. When the purchase price of a property is too high to be paid in full, you can make a down payment and borrow the rest of the amount. You will then continue to make regular payments until you’ve paid back the entire purchase price.
If you don’t have enough money for a larger down payment, most traditional lenders will require that you purchase private mortgage insurance. The cost depends on the amount of money borrowed and the size of the down payment.
In Canada, private mortgage insurance is mandatory for any homebuyer who puts down less than 20% as a down payment on a conventional mortgage loan.
What Is Private Mortgage Insurance?
Private mortgage insurance is a type of insurance that protects the lender in case you default on your loan. If you don’t make your payments, the lender can foreclose on your home and sell it.
PMI does not protect the borrower but can be used as an alternative for down payment assistance or in addition to other types of financing, such as government-insured loans.
Borrowers looking to purchase investment properties, those with a down payment of less than 20% or who have trouble qualifying for a government-insured loan, can also use a PMI.
Private mortgage insurers in Canada work closely with lenders and borrowers to help them decide whether this type of insurance is right for them. They assess the borrower’s ability to repay their loan in the long term and help ensure that any high-risk mortgages are covered.
Types Of Private Mortgage Insurance In Canada
There are three types of private mortgage insurance in Canada.
1. Mortgage Insurance Premium (MIP)
Mortgage insurance premium (MIP) is the most common type of private mortgage insurance. It’s usually required when you borrow more than 80% of the purchase price and/or your down payment is less than 20%.
MIP is typically included in your monthly mortgage payments. The premium amount depends on the size of your down payment, the amount borrowed, and your credit score.
2. Mortgage Loan Insurance (MLI) Or Mortgage Life Insurance (MLI)
A mortgage loan insurance is a type of life insurance policy that protects lenders in the event of a borrower’s death. Mortgage loan insurance is typically sold by mortgage banking institutions to protect their investment.
The term mortgage life is used more loosely outside those industries and refers to any kind of permanent or temporary protection on an individual who has taken a loan against their home, including credit cards, car loans, etc.
3. Portfolio Insurance (PI)
Portfolio insurance is a type of financial life insurance designed to pay out if an investor’s portfolio declines below a predefined value. It covers assets like stocks, bonds, mutual funds or other investments.
With this kind of coverage, investors are protected from loss due to market volatility. It also can limit their downside risk with greater certainty than traditional policies typically available for individual accounts at banks or institutional firms.
How Much Does Private Mortgage Insurance Usually Cost?
The amount that a buyer pays for private mortgage insurance will depend on their risk of default. Typically, standard private mortgage insurance costs about 1/3 of the difference between the original loan and what it would cost to obtain a conventional mortgage from another bank or mortgage lender.
If you live in Canada, you have two basic options to pay your private mortgage insurance. You can either make separate monthly payments or include these in your monthly mortgage payment.
Separate Monthly Payments
Private mortgage insurance monthly payments are not included in your mortgage payment. You make a separate payment to your PMI provider, who will then release the funds to your mortgage lender.
Added To Your Monthly Mortgage Payments
PMI can be also added to your monthly mortgage payment. This means that you pay both the principal and interest on your home loan as well as your private mortgage insurance payment. Some lenders do not include the cost of private mortgage insurance in their monthly payments, so ask about this before you sign.
Reasons To Avoid Private Mortgage Insurance
If you live in Canada, the biggest reason to avoid private mortgage insurance is that it’s expensive. PMI costs can add thousands of dollars to your mortgage payment each year, and you’ll continue paying for it until you’ve paid off 20% of your home’s value.
Another reason to avoid PMI is that it doesn’t protect you from defaulting on your mortgage.
If you stop making payments on your mortgage, the lender will foreclose on your home and sell it at a foreclosure sale. You’ll still owe the lender money if they sell your home for less than what you owe them. This is why it’s so important to make sure you can afford the payments on your home before you buy it.
How To Avoid Private Mortgage Insurance
You can avoid private mortgage insurance by making a larger down payment or by borrowing less money. However, making a sufficiently large down payment on a home purchase is not always enough to avoid PMI.
Another option is to work with a private lender instead, as private mortgage insurance is required for conventional loans in Canada, but usually not by alternative lenders. There are exceptions, and some other rules may apply depending on your specific situation, so talking with a trusted mortgage broker in BC can help you assess all your options.
You may also find that some private lenders in Canada are willing to offer you a loan with better terms.
Private mortgage insurance can be confusing, and the details surrounding it can be hard to understand. If you need the help of a mortgage broker in BC to find the best lender for your financial needs, consider giving us a call today.
We are here to help you with all of your home buying needs, including guidance around taking a second mortgage, a home equity loan, a non-resident mortgage, and more.
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