What type of insurance is required when an Alberta buyer makes a down payment of less than 20% of the purchase price?

Q: What is the correct answer to: What type of insurance is required when an Alberta buyer makes a down payment of less than 20% of the purchase price?

The correct answer is Mortgage default insurance (e.g., CMHC, Sagen, or Canada Guaranty). Option B correctly identifies mortgage default insurance as the required coverage. When the down payment is less than 20%, the mortgage is classified as high-ratio, and federal regulations mandate mortgage default insurance to protect the lender against borrower default. The three approved providers are CMHC, Sagen (formerly Genworth), and Canada Guaranty.

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

Mortgage default insurance protects the LENDER (not the borrower) against borrower default on high-ratio mortgages. The premium is calculated as a percentage of the mortgage amount (2.8%-4.0%) based on loan-to-value ratio and is typically added to the mortgage balance. Despite protecting the lender, the premium is paid by the borrower. This insurance enables lenders to offer mortgages with as little as 5% down payment.

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

Below 20% down = high-ratio mortgage = mandatory default insurance. Three providers: CMHC, Sagen, Canada Guaranty. Protects the LENDER, paid by the BORROWER. When the exam mentions 'less than 20% down payment,' immediately connect it to mortgage default insurance. The three provider names (CMHC, Sagen, Canada Guaranty) are key identifiers.

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

Remember that mortgage default insurance protects the lender, not the buyer, even though the buyer pays the premium. This counterintuitive fact is a common exam question angle.

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

An Alberta buyer puts 10% down on a $450,000 home, creating a $405,000 mortgage. The lender requires mortgage default insurance since the down payment is below 20%. The CMHC premium of 3.10% ($12,555) is added to the mortgage, making the total $417,555. The buyer benefits from accessing homeownership sooner despite the additional insurance cost.

Question

Mortgage & Real Estate FinanceABEASY

What type of insurance is required when an Alberta buyer makes a down payment of less than 20% of the purchase price?

Answer Options

A

Title insurance

B

Mortgage default insurance (e.g., CMHC, Sagen, or Canada Guaranty)

C

Home warranty insurance

D

Flood insurance