Mortgage default insurance is an insurance product that compensates lenders for losses incurred from mortgage defaults.
In Canada, mortgage insurance is mandatory for home purchases where the borrower contributes less than a 20% down payment.
The cost of mortgage insurance is based on a sliding scale; the smaller the down payment, the higher the premium required.
Borrowers who put down 20% or more are exempt from paying mortgage default insurance.
While mortgage default insurance aims to protect lenders, it also indirectly benefits homebuyers.
By acting to mitigate default risk, mortgage insurance enables financial institutions to issue mortgages to a broader range of homebuyers, some of whom may fail to qualify for one otherwise.
Lenders will also be more inclined to approve borrowers who put less money down and extend financing to them at lower interest rates.
How Does Mortgage Default Insurance work?
As the borrower, you don’t receive cash proceeds from the insurer should you default on your payments.
Any payout in such an event goes to your lender only.
However, you’re the one responsible for covering the cost of the mortgage insurance premium.
Your lender pays the insurer the required premium directly, but they pass the cost onto you.
So how do you go about getting this insurance product?
Luckily, your lender already has an established business relationship with an insurer, who will act as the underwriter for your contract.
They’ll coordinate the entire process on your behalf.
To obtain approval for mortgage insurance, you must meet the insurer’s eligibility criteria.
The most well-known mortgage insurance provider in Canada is the Canada Mortgage and Housing Corporation (CMHC).
Here are some of the criteria you must meet to qualify for a CMHC-insured mortgage:
- Your credit score must be at least 600
- Your gross debt service (GDS) ratio must be 39 or less
- Your total debt service (TDS) ratio must be 44 or less
- Your down payment must not originate from borrowed funds
- Your maximum amortization must not exceed 25 years
- You must put down a minimum of 5% if your home’s purchase price is under $500,000. If your home is priced at $500,000 or more, you must pay a minimum down payment of 5% on the first $500,000 and 10% on the remaining balance.
Your lender will specify your insurance premium when you apply for a mortgage.
You can choose to add your total premium on top of your mortgage, which you’ll pay over time through your monthly payments.
Or you can pay it upfront as a lump sum.
If you’re purchasing a property in Quebec, Ontario, or Saskatchewan, mortgage insurance is subject to provincial sales tax.
You can’t add the provincial sales tax to your mortgage; instead, you must pay for it upfront with your other closing costs.
Did You Know?
Mortgage default insurance isn’t available for homes valued at $1,000,000 or more.
How Much is Mortgage Default Insurance?
Your mortgage insurance premium is determined as a percentage of your total mortgage based on your down payment.
As a result, the larger your down payment, the lower the premium you can expect to pay.
In addition to CMHC, there are two other mortgage insurance providers in Canada: Sagen (formerly Genworth Financial) and Canada Guaranty.
Below is a table that shows your mortgage insurance premium amount if CMHC acts as the underwriter.
The Loan-to-value ratio refers to the size of your mortgage relative to your home’s purchase price.
|Loan-to-Value Ratio||Premium on Total Loan|
|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%|
If your credit score is less than stellar or you have an inconsistent income, your lender may require that you acquire mortgage insurance even if your down payment exceeds 20%.
How to Avoid Mortgage Default Insurance
By law, you must acquire mortgage insurance if your down payment is less than 20%; there’s no way to escape it.
Beyond that, it’s unlikely your lender will ask you to pay for mortgage insurance unless they deem you a high-risk borrower following an assessment of your finances.
Your lender will waive the mortgage insurance requirement if you have a solid credit history and a robust income.
Suppose you port your mortgage to another property.
In that case, you may be able to reduce or eliminate your new mortgage insurance premium.
Be sure to check with your lenders’ terms and conditions regarding this arrangement.
Should you refinance your current mortgage, you may be able to bypass any additional mortgage insurance requirement if you have sufficient equity in your home.
As with porting, be sure to contact your lender for details.
Frequently Asked Questions
- Is mortgage default insurance refundable?
No, mortgage default insurance is a non-refundable financial product.
However, you could be eligible for a partial rebate if your home meets certain standards.
For example, you can receive up to 25% back on your CMHC insurance premium if you buy an energy-efficient home.
- Is default insurance added to the mortgage?
Yes. Typically, borrowers blend their mortgage insurance premium with their mortgage to pay it off slowly over time. The only exception is provincial sales tax charged on the insurance premium, which is payable in full on closing day.
However, you can elect to pay the entire premium upfront as a lump sum if you wish.