If you’re buying a home and have a down payment of less than 20%, you’ll need to purchase mortgage default insurance, also known as mortgage loan insurance or CMHC mortgage insurance (named after the Canada Mortgage and Housing Corporation, one of the three mortgage insurance providers in Canada). In the end, all three terms refer to insurance that protects the lender if you become unable to make your mortgage payments.
Read on to learn how mortgage default insurance works, how much it costs and how to calculate your mortgage insurance premium and fees.
What is mortgage default insurance (CMHC insurance)?
Mortgage default insurance protects the lender if you, as the borrower, stop making your mortgage payments or break the terms of your mortgage contract. It is not the same as mortgage life insurance, mortgage protection insurance or mortgage disability insurance—forms of insurance that help cover the balance of your mortgage if you die or become unable to work due to a serious illness or injury.
Mortgage default insurance can add up to thousands of dollars; however, it is mandatory for home buyers with a down payment of less than 20%. The benefit is that, because the insurance makes the mortgage less risky for lenders, it can mean getting a more favourable interest rate on your mortgage.
Homes worth $1 million or more (for which buyers need a down payment of at least 20%, as set out by the Government of Canada) aren’t eligible for mortgage default insurance.
How much is mortgage default insurance in Canada?
The cost of mortgage default insurance is tied to the amount of money you are borrowing for your mortgage.
To know how much you’ll pay, you first have to determine your loan-to-value ratio (LTV) by dividing your mortgage amount by the purchase price of the home. (To figure out your mortgage amount, subtract your down payment from the purchase price.) For example, if you have a 5% down payment, the loan-to-value ratio is 95%—another way of saying your mortgage represents 95% of your home’s value.
Your mortgage default insurance premium is calculated based on the loan-to-value ratio. For insurance on properties with a down payment of less than 20%, your premium will be somewhere between 2.8% and 4% of your mortgage amount. The premium is the same for all three mortgage default insurance providers in Canada.
If you have a down payment of more than 20% (in the chart below, these scenarios are noted with an asterisk), you won’t have to pay for mortgage insurance. However, your lender may choose to purchase it anyway.