Mortgage loan insurance
Understand what it is and why it's necessary
Canadian Western Bank (CWB) and its partner companies are required to protect themselves from borrowers defaulting on mortgages. Read the full details below to understand coverage details and what they mean for you.
What is mortgage loan insurance?
Mortgage loan insurance (also referred to as "default insurance") protects lenders such as CWB and Canadian Western Trust (CWT) from loss due to a borrower defaulting on a mortgage. Banking laws require default insurance when the down payment is smaller than 20% of the property value. Even when down payments are 20% or more, lenders may still require default insurance due to individual borrowing circumstances, such as property location or property type.
Who pays?
The borrower pays the default insurance premium. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
How do consumers benefit?
Consumers can become home owners sooner. Default insurance enables consumers to purchase homes with a down payment as low as 5%, at interest rates comparable to mortgages with a 20% down payment.
How do CWB and CWT benefit?
Default insurance helps to protect CWB and CWT against loss as a result of a mortgage default, and allows us to offer mortgages with down payments of less than 20%. This insurance reduces the risk of loss, allowing us to offer borrowers (like you) mortgages at much lower interest rates and with smaller down payments than would otherwise be required. CWB and CWT receive no payments or benefits other than payment received by us in respect of a claim made by us under the default insurance.
Cost
Default insurance is calculated as a percentage of the mortgage amount and is based on the size of the down payment and the amortization period. Other factors can also influence the cost. Mortgage interest accrues on the full amount of the mortgage, including the insurance premium, if it was added to the loan.
Example of how an insurance premium is calculated:
Ilyas and Walid buy a house with a purchase price of $280,000. They have $14,000 available to pay up front, which is a down payment amount of 5%. Since this amount is less than 20% of the purchase price, they will need to purchase default insurance for their mortgage. The default insurance premium is 4% of their total mortgage amount which equals $10,640*. They can decide if they want to add this insurance premium amount to their total mortgage, or they can choose to pay the $10,640 insurance premium up front. For this purchase, they decide to add the insurance premium amount to their mortgage, making their total loan amount $276,640. Interest will accrue on the full amount of the mortgage, including the insurance premium.
*Insurance premium = ($280,000 - $14,000)*4%=$10,640
For additional information about mortgage default insurance please contact the banking centre where you do business, or visit these websites: