Did you know that by law in Canada, if your down payment is less than 20% of the value of the home you are purchasing, you are required to obtain mortgage insurance? Mortgage insurance is not the same as life insurance or home insurance.
Mortgage Insurance is the insurance required by the government in case you default on your mortgage. This insurance protects the banks from losing their investment.
The three main mortgage insurance companies in Canada are Canada Mortgage Housing Corporation (CMHC), Genworth Financial, and AIG United. An example of the advantage of mortgage insurance is a story that recently took place in Halifax.
There was a couple, husband and wife, with three kids. One morning the husband wakes up to find that his wife has up and left him overnight. So this husband is left with the three kids and a mortgage payment that he cannot afford on his wage alone.
He decides that the smart thing to do, knowing he was going to default, was walk into the bank and hand in his keys. The bank calls his mortgage insurance company.
In this case the mortgage insurance company for this client covers half the mortgage payment and starts building an addition on to the client’s house. They also help him find a tenant to rent the addition, thus making up the missing income required to make the mortgage payment and allowing the client to keep his home.
They also gave him a promissory note, interest free, for the cost of the addition. They also went above and beyond by stating to the client that if he makes his mortgage payments on time for the next five years that they would forgive the entire promissory note as well.
This may not be the outcome for all situations but the cost of foreclosing on a house with all the fee’s involved is in the range of $50 000. So in most cases, it’s beneficial for the mortgage insurance company to find ways to keep you in your home.
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So if I think I can’t make my mortgage payment and default, my mortgage insurance company will make my payment?
@Norton Green
Not at all. You would have to go through your lender first and see where they stand. The point I was trying to get across is that if your upfront and tackle the problem before it arises, you may encounter flexibility from your lender and your mortgage insurance company.