Many young Canadians are struggling to save a sizable down payment and fulfill their dream of purchasing a house. Canadian homebuyers planning to make a down payment of less than 20% can qualify for a mortgage by purchasing mortgage default insurance. Mortgage insurance costs homebuyers approximately 2.8% to 4% of their mortgage amount. If mortgage insurance were not available, mortgage rates would be much higher because the risk of a buyer defaulting would be much higher. However, lenders can offer lower interest rates when protected by mortgage insurance because the default risk is passed to the insurer.
Where can you get mortgage default insurance?
In Canada, three providers offer mortgage default insurance:
- Canada Mortgage & Housing Corporation (CMHC)
- Canada Guaranty
- Genworth Financial
How to qualify for mortgage default insurance
Mortgage default insurance in Canada has specific qualification requirements:
- A maximum repayment time of 25 years
- Homes costing $1 million or more do not qualify for coverage under mortgage default insurance. You’ll need to make a 20% down payment for these homes.
As of July 1, 2020, you must also meet the following requirements:
- At least one borrower has a credit score of 600 or higher
- Not borrow money for a down payment
- Have a gross debt ratio of less than 39%
- Have a total debt ratio of less than 44%
Rates for mortgage default insurance
The mortgage default insurance rate depends on the value of your down payment. Here are some scenarios to consider:
- If the loan is up to 65% of the home’s value, you’ll be paying a premium of 0.60% for mortgage insurance.
- If the loan is 65-75% of the home’s value, you’ll be paying a premium of 1.70% for mortgage insurance.
- If the loan is 75-80% of the home’s value, you’ll be paying 2.40% for mortgage insurance.
- If the loan is 80-85% of the home’s value, you’ll be paying 2.80% for mortgage insurance.
- If the loan is 85-90% of the home’s value, you’ll be paying 3.10% for mortgage insurance.
- If the loan is 90-95% of the home’s value, you’ll be paying 4% for mortgage insurance.
If you have a down payment of 20% or more, you don’t have to purchase mortgage default insurance. Lenders often purchase CMHC insurance on your mortgage, whether you do or not. The rates are the same across the board, no matter what insurance company you choose. Borrowers buying a property in Quebec, Saskatchewan, Manitoba, and Ontario must pay a provincial sales tax. You cannot add this amount to the mortgage; it needs to be paid in cash upfront.
How to calculate mortgage insurance
Outlined below are some examples to demonstrate how mortgage default insurance is calculated.
You plan to purchase a home worth $400,000, and you intend to make a down payment of $40,000, your mortgage default insurance premium will be calculated as follows:
- The first step is to calculate what percentage of the purchase price is your down payment. In this case, it is 10%.
- The next step is to calculate your mortgage value. Deducting the down payment amount of $40,000 from the purchase price, $400,000, leaves us with $360,000.
- Finally, you will need to consider the applicable insurance rate that will apply to your situation. In this case, since your mortgage value is 90% of the total price, the insurance rate will be 3.10%. With this, you can calculate the premium on your mortgage insurance. $360,000 x 3.10% = $11,160
How to pay mortgage default insurance
The mortgage insurance amount is added to your mortgage itself. The premiums are also added to the monthly mortgage payments. You don’t need to dip into your savings to pay this amount upfront like some other closing costs. If we look at the example in the previous section, your mortgage loan value will be $371,160 ($360,000+$11,160).
Can you decrease mortgage default insurance premiums?
The only ways to decrease your mortgage default insurance premiums are to increase your down payment or choose a less expensive home. If you are a first-time homebuyer, you can take advantage of the RRSP Home Buyer’s Plan and make a tax-free withdrawal from that. As of July 1, 2020, you can no longer borrow money for your down payment if you want CMC coverage.