How Does Mortgage Default Insurance Work?
Mortgage insurance, also called “mortgage default insurance” or “CMHC insurance,” protects lenders in the event homeowners stop making payments on their mortgages.
If you're required to buy mortgage insurance, your lender arranges it 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).
Is mortgage default insurance mandatory?
If you’re buying a home with a down payment of less than 20% of the home’s purchase price, you have to purchase mortgage insurance.
Mortgage insurance is not available for homes worth $1.5 million or more. Properties beyond the $1.5 million cap require a minimum down payment of 20%.
Don’t confuse mortgage default insurance with mortgage protection insurance.
Mortgage default insurance is arranged by your lender and paid by you, to protect your lender in the event that you stop making mortgage payments and default on your loan.
Mortgage protection insurance is a product you can purchase through a bank or insurance company to cover your mortgage payments in case your family’s primary breadwinner becomes unable to work and contribute financially.
What mortgage default insurance costs
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 less than 10%: 4.5%.
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 4.5% 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.
You may be eligible for 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.
Where to get mortgage default 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 mortgage insurance as “CMHC insurance.”
Qualifying for mortgage insurance
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. Historically, the amortization period for insured mortgages has been 25 years. But first-time home buyers and anyone buying a new build can now get an insured mortgage with a 30-year amortization.
Frequently asked questions
Do I have to get mortgage insurance?
Do I have to get 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.
What is CMHC insurance?
What is CMHC insurance?
“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.
DIVE EVEN DEEPER
