Mortgage default insurance, also called CMHC insurance, is mandatory in Canada for down payments between 5% and 19.99%. Mortgage default insurance protects lenders if a borrower ever stopped making payments and defaulted on their mortgage loan.
1. What is the benefit of mortgage insurance?
The downside to mortgage insurance is that it’s an added cost to the homebuyer. In fact, it could cost the homebuyer anywhere between 2.8% and 4% above their mortgage amount.
The upside to mortgage insurance is that it makes home ownership accessible to more people. Without it, default risk would increase, so lenders would increase their rates to protect themselves from that added risk. Higher mortgage rates means that it would make buying a home more expensive, making it out of reach for some buyers who currently can afford a home.
Because mortgage insurance protects lenders from defaults, they can offer lower mortgage rates, which benefits the homebuyer.
2. How do I qualify?
There are some requirements you must meet to qualify for mortgage default insurance. Here are 3:
- The maximum amortization for insured mortgages is 25 years.
- If the purchase price is between $500,000 and $999,999, you’ll need a higher down payment. The minimum down payment is 5% for the first $500,000, and 10% on anything above that.
- Mortgage default insurance isn’t available on homes over $1 million, which means you’ll need a 20% down payment on these homes.
3. Who offers mortgage default insurance?
There are 3 mortgage default insurance providers in Canada:
- Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial
- Canada Guaranty
4. What are the mortgage insurance rates?
To determine which mortgage default insurance premium rate you’ll have to pay, calculate how much your down payment (loan) is as a percentage of your home’s purchase price (value).
Then use the table below to find the premium rate for your down payment scenario.
| Loan-to-value ratio | Premium on total loan amount | Premium on increase to loan amount for portability |
|---|---|---|
| Up to 65% | 0.60% | 0.60% |
| 65.01–75% | 1.70% | 5.90% |
| 75.01–80% | 2.40% | 6.05% |
| 80.01–85% | 2.80% | 6.20% |
| 85.01–90% | 3.10% | 6.25% |
| 90.01–95% (traditional down payment) | 4.00% | 6.30% |
| 90.01–95% (non-traditional down payment) | 4.50% | 6.60% |
For example, if you make a 5% down payment, then the loan-to-value amount will be 95%, making your premium 4%. If you wanted to increase the loan amount for portability, then your premium would be 6.3%.
Note: These same rates are charged by all 3 providers: CMHC, Genworth and Canada Guaranty.
5. How do you calculate mortgage default insurance?
Let’s say you just purchased a home for $300,000 and made a $40,000 down payment. Your mortgage default insurance premium would be calculated as follows:
Step 1 : Calculate your down payment as a % of your home price
$40,000 down payment ÷ $300,000 home value = 13.33% down payment
Step 2 : Calculate your mortgage amount
$300,000 (home value) – $40,000 (down payment) = $260,000 mortgage amount
Step 3: Determine your premium using the chart above
A 13.33% down payment means you have a loan-to-value ratio of 86.67%, which gives you a premium of 3.10%
Step 4 : Calculate your mortgage insurance premium
$260,000 (mortgage amount) × 3.10% (insurance premium) = $8,060 (insurance premium)
6. How do you pay mortgage default insurance?
Mortgage default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your monthly mortgage payment, so you pay it off over the life of your loan.
Continuing the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060. That’s how much you’d need to borrow from your lender, to purchase your home.
7. How to minimize insurance for mortgages?
There’s only one way to minimize your mortgage default insurance: increase your down payment as a percentage of your home price.
To do this, you either have to increase how much you put down or purchase a less expensive home. If you really want that home though, consider additional sources for your down payment, such as a gift from a family member or, if you’re a first-time homebuyer, a tax-free withdrawal from your RRSP.
If you have any questions about mortgage default insurance, contact us today. One of our brokers would be happy to clarify or explain things for you.