What is Mortgage Default Insurance?
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Buying a home is one of the largest investments most of us will make in our lifetimes. While it is a goal of many, life and household expenses seem to be never-ending. It can feel impossible to save up enough for a down payment to apply towards a mortgage.
Did you know that Canada has one of the largest populations of homeowners among OECD nations? Up to 69% of Canadians own their homes. This is in part thanks to accessible home financing options (despite extremely high prices in much of the country). Mortgage default insurance is a valuable tool that allows buyers to purchase a home with as little as 5% as a down payment.
This guide will go through what mortgage default insurance is, how it works, and how much you can expect to pay. The tool above will let you quickly calculate your default mortgage insurance.
What is mortgage insurance?
Many Canadians dream of homeownership, yet few are able to purchase an entire home without financing. Instead, most soon-to-be homeowners contribute a percentage of the price of the home, which is known as a down payment. They borrow the rest from a lender in the form of a mortgage.
Once you purchase your dream home, what happens if you cannot continue to make your mortgage payments? This is where mortgage default insurance comes into play.
Mortgage default insurance is designed to protect the lender if a borrower stops making payments on their mortgage. Without this protection, lenders would extend credit to far fewer would-be homebuyers.
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How does mortgage default insurance work?
Mortgage default insurance is a premium that is paid by the borrower to the lender. The premium is added to the principal amount of the loan. It is paid off either all upfront or in installments rolled into your monthly premiums. If a sales tax is applicable, it is paid separately at closing (and not added to your principal amount).
The insurance is offered by three mortgage insurers, the largest being the Canada Mortgage and Housing Corporation (CMHC). This helps to improve Canadians’ access to housing.
In Canada, the insurance is paid in full when the borrower gets the mortgage. These are common on high-ratio mortgages, a loan that is higher than 80% of the lending value of the property.
Mortgage default insurance is not required in Canada if your down payment is at least 20%. It is mandatory if the down payment is under 20%. Currently, it is not available for homes with a purchase price of over $1 million.
Remember that your home will belong to the lender up until all the money borrowed is paid back in full.
How much is mortgage default insurance?
Mortgage default insurance ranges from 0.6% to 4.5% of the mortgage depending on the size of your down payment. Our CMHC calculator at the top of this page will do this calculation for you.
If you put a down payment of less than 20% on a home, you are required to purchase mortgage default insurance as a condition of qualifying for a conventional mortgage.
The percentage will depend on the size of the down payment. The smaller the down payment, the higher the perceived risk of default on the loan is, and the more expensive the insurance.
|Up to and including 65%||0.60%|
|Up to and including 75%||1.70%|
|Up to and including 80%||2.40%|
|Up to and including 85%||2.80%|
|Up to and including 90%||3.10%|
|Up to and including 95% (traditional down payment)||4.00%|
Calculating the premium for a new home purchase:
Imagine you take out a mortgage for $500,000. You pay $50,000 as a down payment giving you a loan-to-value ratio of 90%. At this amount, the premium on the total mortgage amount is 3.10%. Your mortgage default insurance would work out to be $15,5000 ($500,000 × 3.10%)
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Note: Ontario, Quebec and Saskatchewan apply sales tax to this insurance premium.
If you live in these provinces you will owe a little more for your mortgage default insurance. In Ontario add 8% provincial sales tax on the $15,500. This works out to a $1,240 tax due.
Is mortgage insurance mandatory?
The Canadian government requires homebuyers to purchase mortgage default insurance if the down payment is less than 20%.
To be eligible for mortgage default insurance, you will first have to meet your bank’s lending requirements and the underwriting standards of your mortgage insurer. The insurance is offered by three mortgage default insurers: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.
While the main focus of this insurance is protecting your lender from losing money if you default, it can also benefit you. By lowering the risk to the lender, they can be more flexible in whom they lend to. They even approve many loans with as little as a 5% down payment. This can help you to buy your home sooner rather than saving up a down payment for years. The conventional 20% can put homeownership out of reach for many buyers.
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Curious to learn more about how mortgages work and to get the best rates? See our mortgage guide.
How much is sales tax on mortgage default insurance?
Provincial sales tax is applied to mortgage default insurance premiums in three provinces. While mortgage default insurance premiums can be paid in installments or all upfront, sales tax on the premiums is due upfront as part of closing costs on your new property.
|Province||Name of sale tax||Tax rate|
For an example of how this works, imagine you purchase a $500,000 property in Ontario. You put down 5% as your down payment. Your mortgage insurance would cost $19,000. 8% PST is $1,520, due at closing.
Who offers mortgage default insurance?
Canada Mortgage and Housing Corporation (CMHC) is the largest mortgage default insurance provider. It is a Crown corporation that improves access to housing for Canadians by providing mortgage liquidity. CHMC is so commonly used for mortgage default insurance, that mortgage insurance is frequently referred to as CHMC insurance.
The other two mortgage insurers are Canada Guaranty and Genworth Financial. Both are private companies. Each sets its own rules regarding the types of mortgages that it will insure and under what requirements.
Each insurer provides the same type of service; however, you may not know which provider is supplying your insurance unless you specifically inquire about it.
If this type of insurance did not exist, many buyers would be unable to qualify for a mortgage. This is because lenders do not want to assume any more risk than necessary when approving a borrower for a mortgage. The way they see it, the smaller the down payment you make, the more of a risk you are to default.
Are you looking for a mortgage? You can quickly see if qualify using our tool below:
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What does mortgage insurance cover?
When you purchase a home through a lender, the lender owns the home until you pay it off. The lender assumes that you will continue to make your payments. Mortgage insurance covers the mortgage loan amount in the event that you are unable to continue to pay your mortgage payment. It reimburses the lenders in the event of default.
Mortgage default insurance does not cover anything else in regard to your home or mortgage.
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How can I avoid paying mortgage insurance?
If you want to avoid paying mortgage insurance altogether, the only way is to wait to purchase a home until you have at least 20% to put as a down payment.
Mortgage insurance is not mandatory by law; however, borrowers are required to purchase it unless they put down at least a 20% down payment.
Consider buying a cheaper house, as that will lessen the amount of mortgage default insurance you will have to pay.
If you renew your mortgage, be sure to tell your new lender if you already have mortgage loan insurance. This will help you avoid paying premiums twice!
Mortgage default insurance vs mortgage life insurance
Although the names are the same, these products are very different. Mortgage default insurance is meant to protect the lender if you default on your mortgage payment. Mortgage life insurance is a type of life insurance. It is designed to pay off or pay down the mortgage in the event of your death.
Mortgage life or mortgage protection insurance, unlike mortgage default insurance, is completely optional.
Mortgage default insurance
- Makes it possible to be approved for a mortgage even with a small down payment
- Not mandatory if 20%+ is put down
- Sales tax is applicable
- Not available on home purchases over $1 million
- The smaller the down payment, the higher the premium
Mortgage life insurance
- Pays off your mortgage in the event of your death
- People who do not qualify for traditional term insurance may be approved
- There is no payout once a mortgage is paid off
- Premiums may fluctuate