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Mortgage Default Insurance (CMHC Insurance)
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Mortgage default insurance protects lenders in case borrowers become unable to make their mortgage payments. This type of insurance is available for higher-ratio mortgages if the home’s purchase price is less than $1 million. The maximum allowed time for amortization is 25 years for mortgages that are insured with this type of insurance.
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 type of insurance offers.
Getting lower rates makes it possible for buyers to borrow more money. Buying power increases and buyers can get more in return for the dollars that are invested.
Which Companies Offer Mortgage Default Insurance?
There are several insurers that offer this type of insurance. Some of the most popular providers are:
- Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial
- Canada Guaranty Mortgage Insurance Company
Borrowers can obtain this type of insurance through lenders if the insurance is needed.
Requirements For Mortgage Default Insurance
In addition to the mortgage stress test, there are a few other requirements that must be met in order for you to be eligible for mortgage default insurance.
- Mortgage default insurance is only available for properties priced at $1,000,000 and below. That means, if you want to purchase a property that is over $1,000,000, you will have to make a down payment of at least 20%.
- For properties with a price tag between $500,000 and $1,000,000, borrowers must provide a 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% downpayment.
- Your mortgage amortization period must also not exceed 25 years.
When is Mortgage Default Insurance Not Required?
Borrowers who can make a down payment equal to 20% of the amount of their loans usually are not required to obtain mortgage default insurance. When this happens, buyers qualify for a conventional mortgage. Of course, there are exceptions to this situation. If a buyer’s salary fluctuates, insurance may be required.
How Much are Mortgage Default Insurance Premiums?
A borrower’s premium is determined by their loan-to-value ratio or by the size of their down payment. Buyers who make larger down payments can expect to pay less. In most cases, payments 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)
Do keep in mind that these rates are approximated and can change. If you live in Ontario, Quebec, Manitoba, or Saskatchewan, you’ll also have to pay provincial taxes on the premium. Moreover, as mentioned those who provide a down payment of 20% or more are not obligated to purchase mortgage default insurance. Those putting down 20% or more as a down payment may also be eligible for premium savings. You may qualify for these saving if:
- you are porting your mortgage or;
- you are 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, first find the answers to the following questions.
- How much are you putting down as a down payment?
- What is your mortgage amount (House price – down payment amount)?
- What is your expected premium based on the table above?
|Down payment (15%)||$52,500|
|Mortgage amount||$297,500 (350,000 – 52,500)|
|Cost of your Mortgage Default Insurance||$8,330 (297,500*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. Mortgage default insurance isn’t like lawyer’s fees, closing costs, or land transfer taxes. Buyers don’t have to make a lump sum payment at the time of purchase unless they prefer to. The insurance premium is usually added to the value of the mortgage and is paid back through your monthly payments. As a result, you monthly mortgage payments increase according to the amount that is borrowed.
Why is Mortgage Default Insurance Important?
Most lenders are limiting lending amounts to less than 80% of the property’s value if the mortgage isn’t insured. If a buyer cannot qualify for insurance, then a separate loan must be obtained from a secondary lender to make up the difference. This biggest disadvantage with this type of loan is that interest rates will be higher. Additionally, amortization will be shorter. This leads to larger mortgage payments for buyers. Second mortgages are more expensive than first mortgages. This is especially true when the amount borrowed is greater than 75% of the property’s market value.
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