What is the primary purpose of mortgage default insurance in Canada?
Correct Answer
B) To protect lenders from borrower default
Mortgage default insurance protects lenders, not borrowers, from financial loss if a borrower defaults on their mortgage payments. This insurance is mandatory for mortgages with down payments less than 20% and allows lenders to offer mortgages with lower down payments while managing their risk exposure.
Why This Is the Correct Answer
Option B is correct because mortgage default insurance specifically protects lenders from financial loss when borrowers default on their mortgage payments. Under Canadian mortgage regulations, this insurance is mandatory for high-ratio mortgages (those with less than 20% down payment) and is provided by approved insurers like CMHC. The insurance coverage reimburses the lender for losses incurred from borrower default, foreclosure, or power of sale proceedings. While borrowers pay the premium, the protection and benefits flow directly to the lending institution, allowing them to offer mortgages with lower down payments while maintaining their risk management standards.
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