What Is Mortgage Default Insurance?
Mortgage default insurance, also known as mortgage loan insurance, is a type of insurance that protects the lender if a borrower stops making mortgage payments. It does not protect the buyer. In Canada, this insurance is required when a homebuyer makes a down payment of less than 20% of the home’s purchase price.
The insurance is provided by three major institutions: CMHC, Sagen, and Canada Guaranty. It allows lenders to offer mortgages to buyers with smaller down payments, while transferring the risk of default to the insurer.
- Protects the lender, not the buyer.
- Required for down payments under 20%.
- Premiums are based on the down payment size and mortgage amount.
Who Needs It? High-Ratio Mortgages Explained
In Canada, mortgage default insurance is required when the loan-to-value (LTV) ratio is more than 80%. This means you must have a down payment of less than 20% of the home's purchase price. Such mortgages are called high-ratio mortgages.
The minimum down payment is 5% for homes priced $500,000 or less. For homes between $500,000 and $1,499,999, the minimum down payment is 5% on the first $500,000 plus 10% on the portion above $500,000. Mortgage default insurance is not available for homes priced over $1.5 million.
- Down payment less than 20% triggers insurance requirement.
- Minimum down payment is 5% for homes up to $500,000.
- For homes above $500,000, the minimum down payment is 5% on the first $500,000 and 10% on the remainder.
- No insurance for homes over $1.5 million.
The Three Major Insurers: CMHC, Sagen, Canada Guaranty
In Canada, three providers offer mortgage default insurance: CMHC (Canada Mortgage and Housing Corporation), Sagen, and Canada Guaranty. CMHC is a federal Crown corporation, while Sagen and Canada Guaranty are private insurers.
All three providers must follow the same federal regulations regarding when insurance is required, but premium rates may differ. This guide provides CMHC premium rate information; for Sagen and Canada Guaranty, check their official sources for current rates.
- CMHC is a government-backed insurer.
- Sagen and Canada Guaranty are private insurers.
- All three provide insurance for high-ratio mortgages.
How Are Premiums Calculated? Table and Examples
Mortgage loan insurance premiums are based on the size of your down payment and the total mortgage amount. In general, the smaller your down payment, the higher the premium rate. Premium rates range from 0.6% to 4.5% of the total mortgage amount.
For example, consider a $750,000 home with a $60,000 down payment (8% down). The mortgage amount would be $690,000. This premium can be paid in full at the time of purchase or added to the mortgage amount.
| Down Payment Percentage | Premium Rate (% of Mortgage Amount) |
|---|---|
| 5% to 9.99% | 4.00% |
How Does Mortgage Default Insurance Affect Your Payment?
If you choose to add the insurance premium to your mortgage amount, it increases the total mortgage balance and therefore increases your monthly mortgage payment. This larger principal means higher monthly payments compared to a mortgage without the premium.
Alternatively, you can pay the premium in full at closing, which avoids increasing your mortgage balance but requires a larger upfront cash outlay. The decision depends on your cash flow and financial goals.
- Adding the premium to the mortgage increases the principal and monthly payment.
- Paying upfront avoids interest on the premium but requires more cash at closing.
- The premium amount is based on the mortgage amount before adding the premium.
Can You Avoid Mortgage Default Insurance?
The simplest way to avoid mortgage default insurance is to make a down payment of at least 20% of the home's purchase price. This reduces your loan-to-value ratio to 80% or less, eliminating the requirement for insurance.
If you cannot afford a 20% down payment, you may still reduce the insurance premium by increasing your down payment. Since premium rates generally decrease as your down payment increases, saving for a larger down payment can lower your insurance costs.
- A down payment of 20% or more avoids the insurance requirement.
- Increasing your down payment within the insured range can lower the premium rate.
- Insurance is not available for homes over $1.5 million, so a larger down payment may be necessary for such properties.
Frequently asked questions
Is CMHC insurance mandatory?
CMHC insurance is mandatory for high-ratio mortgages (down payment less than 20%) if you obtain financing from a lender that requires it. However, you can choose insurance from other approved providers like Sagen or Canada Guaranty, as long as your lender accepts them.
Sources: Canada Mortgage and Housing Corporation (CMHC)Does mortgage default insurance cover the full mortgage amount?
Yes, mortgage default insurance covers the full mortgage amount, up to the maximum allowed. The premium is calculated based on the mortgage amount and the down payment percentage. In the example provided, the premium applies to the entire mortgage amount of $690,000.
Sources: Canada Mortgage and Housing Corporation (CMHC)Sources
- CMHC mortgage loan insurance explained: coverage, premiums and down payments — Canada Mortgage and Housing Corporation (CMHC)