Which scenario would require mortgage default insurance?

Q: What is the correct answer to: Which scenario would require mortgage default insurance?

The correct answer is A borrower purchasing a $400,000 home with a $60,000 down payment. Option C is correct because it results in an LTV ratio of 85% ($340,000 mortgage ÷ $400,000 purchase price). Since the LTV exceeds 80%, mortgage default insurance is mandatory under Canadian federal regulations. The borrower's $60,000 down payment represents only 15% of the purchase price, falling short of the required 20% minimum to avoid insurance. This scenario clearly triggers the insurance requirement that protects lenders against potential default losses.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage default insurance in Canada is required when the loan-to-value ratio exceeds 80%, meaning the down payment is less than 20% of the purchase price. This insurance protects lenders against borrower default and is provided by CMHC, Genworth Canada, and Canada Guaranty. The insurance premium ranges from 0.6% to 4.5% of the mortgage amount, depending on the LTV ratio and amortization period. Federal regulations under the Bank Act and guidelines from OSFI mandate this requirement. The 80% LTV threshold applies to purchases, while refinancing typically allows up to 80% LTV without insurance, though some exceptions exist for certain mortgage products.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember '80-20 Insurance Due' - when the mortgage is more than 80% of the home's value (or down payment less than 20%), insurance is due. Think of it like a seesaw: when the mortgage side tips over 80%, the insurance requirement kicks in to balance the risk. When you see LTV calculations on the exam, immediately check if the result exceeds 80%. If it does, insurance is required. Alternatively, check if the down payment is less than 20% - same result, insurance needed.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

Calculate LTV quickly by dividing mortgage amount by purchase price. If over 80% (or down payment under 20%), insurance is required. Don't get confused by dollar amounts - focus on percentages.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A first-time homebuyer wants to purchase a $450,000 condo but only has $50,000 saved for a down payment. As their agent, you explain that their 11% down payment means they'll need mortgage default insurance, adding approximately $15,000-$18,000 to their mortgage amount. This affects their affordability calculations and monthly payments. You help them understand that while the insurance increases their costs, it enables homeownership with a smaller down payment, and the premium can be paid upfront or added to the mortgage.

Question

Mortgage & Real Estate FinanceMortgage InsuranceMEDIUM

Which scenario would require mortgage default insurance?

Answer Options

A

A borrower purchasing a $500,000 home with a $125,000 down payment

B

A borrower purchasing a $600,000 home with a $150,000 down payment

C

A borrower purchasing a $400,000 home with a $60,000 down payment

D

A borrower refinancing with 25% equity remaining