An insured mortgage is a home loan that is protected by mortgage default insurance. This insurance safeguards the lender in case the borrower cannot make their payments and defaults on the loan.
When It’s Required
In Canada, mortgage insurance is required by law when the buyer’s down payment is less than 20% of the property’s purchase price. This makes the loan less risky for the lender, allowing more people to qualify for mortgages with smaller down payments.
How It Works
The borrower pays an insurance premium, often added to the mortgage balance and repaid over time. In Canada, this insurance is usually provided by the Canada Mortgage and Housing Corporation (CMHC) or private insurers like Sagen and Canada Guaranty.
Benefits
- For lenders: Reduces risk of loss if the borrower defaults.
- For borrowers: Makes homeownership possible with smaller down payments.
Drawbacks
While it expands access to homeownership, mortgage insurance increases the total cost of borrowing. The premium adds to the overall mortgage balance, meaning borrowers pay more interest over the life of the loan.
Final Thoughts
An insured mortgage provides security to lenders and opportunity to buyers with smaller savings. Understanding its costs and benefits helps borrowers decide if this path to homeownership is right for them.