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Mortgage insurance, also called “mortgage default insurance” or “CMHC insurance,” is designed to protect lenders in the event homeowners stop making payments on their mortgages.
Your lender arranges mortgage insurance and passes the cost onto you.
Mortgage insurance makes it less risky for lenders to grant mortgages to people with modest down payment savings, so it makes the housing market somewhat more accessible (while making mortgages themselves more expensive).
Do you have to get mortgage insurance?
If you’re buying a home with a down payment of less than 20% of the home’s purchase price, you have to insure your mortgage.
Mortgage insurance is not available for homes worth $1 million or more because properties in this price range require a minimum down payment of 20%. Beginning December 15, 2024, that cap will rise to $1.5 million.
How much does mortgage insurance cost?
Mortgage insurance will cost you in three ways.
1. Premiums
Mortgage insurance premiums are calculated as a percentage of your principal. CMHC’s insurance rates are as follows:
- For down payments of 5% to 9.99%: 4%.
- For down payments of 10% to 14.99%: 3.1%.
- For down payments of 15% to 19.99%: 2.8%.
If you’re buying a $400,000 home with a 5% down payment of $20,000, you’ll also have to pay a 4% insurance premium on your $380,000 mortgage — another $15,200.
A 10% down payment would leave you with a mortgage insurance bill of $11,160 — a reminder that it’s generally better to make the biggest down payment you can afford.
2. Interest
Mortgage insurance often results in added interest charges. If you aren’t able to pay your premium up front, it’ll be added to your mortgage, which means paying interest on that amount.
In the example above, you’d be paying interest on $395,200 instead of the $380,000 loan principal you applied for.
3. Sales tax
You’ll have to pay provincial sales tax on mortgage insurance premiums if the home you’re buying is in Quebec, Ontario or Saskatchewan. You’ll be expected to pay the tax along with your other closing costs.
These added costs aren’t fun when you’re already dealing with steep home prices and high mortgage rates, but certain government grant programs can help you manage the costs. For example, you can get a refund of up to 25% of your mortgage insurance premiums if you purchase an energy-efficient home or renovate your home to make it a little greener.
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Who offers mortgage insurance in Canada?
There are three providers of mortgage default insurance in Canada: Sagen (formerly known as Genworth Canada), Canada Guaranty and the Canada Mortgage and Housing Corporation (CMHC).
As a crown corporation, CMHC is arguably the most widely known of the three providers.That’s why you may hear some people refer to it as “CMHC insurance.”
Qualification requirements
Even though mortgage insurance may be required when buying a house, you still have to qualify for it. If you don’t meet the following requirements, you won’t qualify and will be denied a high-ratio mortgage.
To qualify for mortgage insurance in Canada, you need:
- A good credit score. That means 600 or above for CMHC and Sagen. Canada Guaranty does not publish minimum credit scores, but it does require a “strong credit profile” for many of its products.
- Manageable debt. Your gross debt service (GDS) ratio (GDS) should be lower than 39%. The maximum total debt service (TDS) ratio is 44%.
- A purchase price under a set limit. If you buy before December 15, 2024, that limit is $1 million. After that, the limit rises to $1.5 million.
- An amortization period of 25 years. Or 30. These rules are in flux. Historically, the payback period for insured mortgages was 25 years. But first-time home buyers can now get an insured mortgage for 30 years if buying a new build. Come December 15, 2024, anyone can buy a new build with a 30-year mortgage, and first-time buyers will be able to purchase any kind of home with that longer amortization period.
Mortgage default insurance vs. mortgage protection insurance
Mortgage insurance can be a little confusing, especially if you’re a first-time home buyer, because of the different terms people sometimes use to describe it. But there is another type altogether — mortgage protection insurance — that can muddy the waters even more.
You can learn about the differences between the two kinds of mortgage insurance below.
| Mortgage default insurance | Mortgage protection insurance | |
|---|---|---|
| Who arranges it? | Your lender. | You, generally through a bank or insurance company. |
| Who pays for it? | You, either as a lump sum at closing or by adding it to your mortgage principal. | You, in premiums/monthly installments. |
| What does it do? | Insures your lender in case you stop making payments and default on your mortgage. | Continues paying your mortgage if your family’s main breadwinner dies or is disabled and unable to earn income. |
Frequently asked questions about mortgage insurance
If your down payment is less than 20% of a home’s purchase price, you’ll have to buy mortgage default insurance in order to be approved for a mortgage.
“CMHC insurance” is another name for mortgage default insurance. CMHC, the Canada Mortgage and Housing Corporation, is one of three providers of mortgage default insurance in Canada. The other two are Canada Guaranty and Sagen.
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