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Buying a home with a down payment of less than 20%? You’ll need mortgage default insurance. Use this tool to figure out how much it will cost.
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.
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.
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.
| Loan-to-value | Mortgage insurance premium applied to mortgage amount |
|---|---|
| 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% | 4.00% |
Using the table above, we can determine the mortgage default insurance premium for any home purchase. For example, let’s say you purchase a home for $700,000 and have $105,000 for the down payment. In this case, your mortgage amount is $595,000, and your loan-to-value ratio is 85%. Based on the table above, your mortgage default insurance premium is calculated as $595,000 x 2.80%, which comes to $16,660.
Instead of making these calculations manually, you can use a mortgage insurance calculator, which lets you adjust various inputs and quickly see the impact they have on your mortgage default insurance premium.
The calculator above is a free tool designed to calculate the total cost of the mortgage loan insurance. It gives you the mortgage insurance fee at a glance, so that you can easily see how the premium varies, based on your down payment.
However, you can also use a free mortgage payment calculator. This tool shows you the cost of mortgage default insurance (based on your down payment) and the taxes owed on the insurance premium (based on your location). In Ontario, Manitoba and Quebec, you must pay provincial sales tax on the premium. That fee is charged upfront and considered part of your closing costs.
You’ll need to meet specific eligibility requirements to qualify for mortgage default insurance. These requirements are in place to ensure that you can faithfully make your mortgage payments. In order to qualify, you must have:
Only three institutions provide mortgage default insurance in Canada. The first is the Canada Mortgage and Housing Corporation, a crown corporation of the Government of Canada. Its mandate is to improve Canadians’ access to housing, and mortgage default insurance is part of that mandate. There are also two private mortgage default insurers in Canada: Sagen (formerly Genworth Financial) and Canada Guaranty.
Though mortgage loan insurance is sometimes referred to as CMHC insurance or CMHC mortgage loan insurance, the crown corporation is now the third-largest provider in the country.
Mortgage insurance providers charge the insurance premium to banks and other mortgage lenders, which in turn pass the costs on to borrowers.
Those costs are usually automatically calculated by your lender and detailed in your mortgage agreement. While you do have the option of paying the insurance in a lump sum, often the premium is added to the mortgage balance, and home buyers pay it off over the life of their loan.
That said, adding your mortgage default insurance premium to your mortgage balance reduces the proportion of your payments that goes towards equity in your home. For this reason, it’s wise to increase your down payment as much as you can. You’ll reduce your mortgage default insurance premium, reduce your monthly mortgage payments and pay less interest over the life of your loan.
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