If you’re planning on making a down payment of less than 20% when you buy a home, be prepared to pay for mortgage default insurance.
This type of insurance protects lenders when borrowers can’t make their mortgage payments. More specifically, it’s required for higher-ratio mortgages. While you may not be fond of the idea of paying an extra fee when you buy a home, mortgage default insurance makes it possible to purchase a home if your down payment is a bit short of a conventional mortgage.
Key Points
- Mortgage default insurance, commonly referred to as CMHC insurance, is required if you make a down payment of less than 20% of the purchase price of a home.
- You can avoid mortgage default insurance if you make at least a 20% down payment, or reduce it by using CMHC’s portability feature.
- Mortgage default insurance costs anywhere from 0.6% to 4.5% on your loan amount.
Mortgage Default Insurance Increases Buying Power For Borrowers
Although mortgage default insurance costs buyers extra money, it provides buyers with a huge benefit. The risk of default would increase without this insurance and mortgage rates would be higher. Mortgage default insurance makes it possible for lenders to offer lower mortgage rates because of the protection this insurance offers.
In turn, lower rates allow buyers to borrow more money, thereby increasing buying power. Essentially, you can get more value in return for the money you’ve invested in a home purchase.
Which Companies Offer Mortgage Default Insurance?
Several insurers offer mortgage default insurance. Some of the most popular providers are:
- Canada Mortgage and Housing Corporation (CMHC).
- Sagen MI Canada (previously known as Genworth Canada).
- Canada Guaranty Mortgage Insurance Company.
Sagen and Canada Guaranty Mortgage Insurance Company are private insurers, while the CMHC is a Crown Corporation.
Borrowers can obtain this type of insurance with the help of their lenders if the insurance is needed.
Requirements For Mortgage Default Insurance
In addition to the mortgage stress test, a few other requirements must be met to be eligible for mortgage default insurance.
- Mortgage default insurance is only available for properties priced under $1 million. That means, if you want to purchase a property of $1 million and over, you will have to make a down payment of at least 20%.
- For properties with a price tag between $500,000 and $999,999, borrowers must provide a minimum down payment of 5% on the first $500,000 and 10% on the remainder, to be eligible for mortgage default insurance.
- For properties under $500,000, you must provide at least a 5% down payment.
- Your mortgage amortization period must not exceed 25 years (except if it’s a new build, you may go up to a 30-year amortization).
When Is Mortgage Default Insurance Not Required?
Borrowers who can make a down payment equal to 20% or more of their home price usually are not required to obtain mortgage default insurance. With a 20% mortgage, you may qualify for a conventional mortgage without any CMHC fees. (a.k.a. mortgage default insurance).
Of course, there are exceptions to this situation. Some buyers may be considered higher risk in the eyes of lenders (i.e. self-employed). In this case, insurance may be required, even with a 20% down payment.
How Much Does Mortgage Default Insurance Cost?
A borrower’s premium is determined by their loan-to-value (LTV) ratio or by the size of their down payment. Buyers who make larger down payments can expect to pay less.
In most cases, insurance premium rates can range from 0.6% to 4.5% of the total amount borrowed from the lender. To give a baseline reference, here is a table of the premiums charged by the CMHC:
| Down Payment Size | Premium Charged |
| 5% | 4.00%(for a traditional down payment) 4.50% (for a non-traditional down payment) |
| 10% | 3.10% |
| 15% | 2.80% |
| 20% | 2.40% |
| 25% | 1.70% |
| 35% | 0.60% |
Keep in mind that these rates are approximate and can change. Further, if you live in Ontario, Quebec, or Saskatchewan, you’ll have to pay provincial taxes on the premium.
Those putting down 20% or more as a down payment may also be eligible for premium savings. You may qualify for these savings if you are:
- Porting your mortgage, or;
- Purchasing an energy-efficient home using CMHC-insured financing.
Calculating The Cost Of Your Mortgage Default Insurance
Here is a quick 3-step guide on how to calculate your Mortgage Default Insurance. Before you start making any calculations, find the answers to the following questions.
- How much is your down payment?
- What is your mortgage amount (house price – down payment amount)?
- What is your expected premium based on the table above?
To illustrate how mortgage default insurance premiums are calculated, let’s use an example:
| House price | $350,000 |
| Down payment (15%) | $52,500 |
| Mortgage amount | $297,500 ($350,000 – $52,500) |
| Premium charge | 2.80% |
| Cost of your Mortgage Default Insurance | $8,330 ($297,500 x 2.80%) |
Don’t want to pay CMHC insurance? Check out how to avoid CMHC fees.
How Is Mortgage Default Insurance Paid?
Borrowers generally finance their mortgage default insurance with their mortgage lender. You have the option to pay your insurance in one lump sum at mortgage closing, much like you would pay your lawyer’s fees, closing costs, or land transfer taxes.
However, it’s more common for the insurance premium to be added to the value of the mortgage and paid back through your monthly payments. As a result, your monthly mortgage payments will increase according to the amount that is borrowed.
Why Is Mortgage Default Insurance Important?
Despite the added premium payments, there are a couple of reasons why mortgage default insurance helps buyers:
You Can Buy A House With A Smaller Down Payment
Mortgage default insurance makes it easier for home buyers to enter the real estate market. You can become a homeowner with as little as 5% down, without having to come up with hundreds of thousands of dollars to get your foot in the door.
Can I Eliminate Mortgage Default Insurance If I Build Up Enough Equity?
Since mortgage default insurance is charged on high-ratio mortgages — or those with down payments of less than 20% — you may wonder if you can eventually get rid of these premiums once you’ve reached at least 20% equity in your home through regular mortgage payments.
Some may assume this can be done because it’s possible in the U.S. But unfortunately, this doesn’t happen in Canada. These premiums don’t just drop off your mortgage payments once your home equity reaches a certain threshold.
The only way you can get rid of your premiums is if you use your insurer’s portability feature when you sell your home.
Portability Feature
CMHC’s portability feature allows you to reduce or eliminate your insurance premiums if you sell your home and buy a new one. This works through premium discounts. The amount of discount you’re eligible for depends on how much time has elapsed between your original mortgage closing date and your new insurance application:
| Elapsed Time From Original Closing Date To New Insurance Application | Premium Credit |
| Within 6 months | 100% |
| Within 12 months | 50% |
| Within 24 months | 25% |
For example, if 6 months have elapsed between your original closing date and the new insurance application, then you would be entitled to a 100% premium discount on the premium that you’ve paid already for your original CMHC-insured mortgage.
Can I Avoid Mortgage Default Insurance?
Besides putting up 20% of the home purchase price to avoid mortgage default insurance, you could work with a private mortgage lender. These lenders generally offer uninsured mortgages with LTV’s as high as 95%. Moreover, private mortgage lenders are not federally regulated and as such do not require you to pass the mortgage stress test to qualify for a mortgage.
That said, while you may be able to avoid mortgage default insurance by working with a private mortgage lender, they do charge much higher interest rates and fees (you’ll likely be required to put more down as well).
Can I Get A Refund On My CMHC Insurance?
Mortgage default insurance is typically non-refundable. However, you may get a partial 25% refund if you buy an energy-efficient home or make efficient upgrades to your existing home through the CMHC Eco Plus program. You must be CMHC-insured to qualify.
If you meet the eligibility criteria for the program, you have 2 years to submit your refund request once you close on your mortgage. You must also submit an eligible third-party certification and/or an EnerGuide label or EnerGuide Renovation Upgrade Report (RUR) with your request.
Final Thoughts
Paying for mortgage default insurance might sound like a pain, but if you’re struggling to come up with a sizable down payment, these extra payments could be worth it. That said, you could save some money on these premiums by making a bigger down payment, or, if you sell, you may be able to use your insurer’s portability feature.
