It’s insurance that protects the lenders (the banks, credit unions or other mortgage lenders), while allowing home buyers to purchase property when they have less than 20% of the purchase price as a down payment. You can even put as little as 5% of the selling price as a down payment using mortgage insurance.
Mortgage insurance exists because all regulated banks, credit unions or other mortgage lenders do not lend money out to purchase homes with less than 20% down payment as the risk is considered too high for them in the case of various factors such as a housing market fluctuation.
When you received a mortgage covered by mortgage loan insurance, your bank can recover the money they lent you should you default on your mortgage payments. This alleviates some of the risk for the lender when you apply for a mortgage.
There are three mortgage insurance companies in Canada, the Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency and a government-owned mortgage insurer, SAGEN and Canada Guaranty. CMHC mortgage insurance, commonly referred to as CMHC insurance or Mortgage default insurance. This is mandatory for Canadian homeowners for down payments of less than 20% of the purchase price.
Seeing as this is an important part of the home buying process for Canadians, here’s a quick rundown of what you should know about CMHC insurance in Canada.
Is mortgage insurance mandatory?
Mortgage insurance is only mandatory if your initial down payment is less than 20% of the purchase price of your home. In this case you’ll be mandated to purchase mortgage insurance as this protects lenders if a borrower suddenly stops making payments and defaults on their loan. Borrowers usually pay insurance premiums in full to their lender at the start of their mortgage term. The lender will choose which mortgage insurer will be used on the loan, this is not something that you need to request.
CMHC, Canada Guaranty and SAGEN Mortgage insurance calculators
Using one of the online calculators can help you understand how the costs can impact your mortgage. Your mortgage broker will also build in the cost to your mortgage quote for you if mortgage insurance is required on your loan. Here are links to the three mortgage insurers online mortgage insurance premium calculators followed by one example.
SAGEN Mortgage Premium Calculator: Click here.
Canada Guaranty Insurance Premium Calculator: Click here.
CMHC Mortgage Calculator: Click here.
For example, let’s assume you purchase a home for $500,000 and made a $50,000 down payment. Your CMHC insurance premium will be calculated like this:
Example 1:
- $500,000 (home price) divided by $50,000 = 10%
- $500,000 (home price)- $50,000 (down payment) = $450,000 (mortgage before CMHC)
- $450,000 (mortgage before CMHC) x 3.10% (CMHC tax rate) = $13,950 (CMHC insurance premium)
- $463,950 (mortgage amount including the mortgage insurance premium)
This is the most basic way to calculate your insurance premium.
The Benefits of mortgage loan insurance
Although the insurance premium may seem costly at first, however, there are a few key benefits to borrowers. For instance, it allows borrowers to purchase home even if they do not have the 20% down payment normally required to obtain mortgage financing. It also allows borrowers to secure a manageable interest rate even with a smaller down payment. Additionally, in times of challenging economic conditions it ensures that mortgage funding will be available.
How to qualify for mortgage default insurance?
Borrowers must meet a certain set of requirements in order to qualify for mortgage default insurance. The requirements are as follows:
- The maximum amortization on your mortgage has to be 25 years.
- Furthermore, if the purchase price of your home is equal to or less than $999,999 default insurance will be available to you. However, if the home to be purchased is $1 million or more, mortgage default insurance will not be available and a minimum 20% down payment will be required.
There are other requirements to qualify for insurance coverage specifically as of July 5, 2021, those are:
- The home is located in Canada,
- Your minimum credit score must be 600 or higher (a lender may have a higher threshold),
- Must have a Gross Debt Service ratio of less than 39%. This is the percentage of your monthly income that covers your housing costs.
- Need to have a Total Debt Service ratio of less than 44%. This is the percentage of your monthly income that covers your housing costs plus all consumer debt payments.
- You cannot borrow money for your down payment however a gift of a down payment from an immediate family member is acceptable for dwellings of 1-4 units.
Mortgage insurance premiums
Your mortgage insurance premium based on the size of your down payment. The bigger your down payment the lower the cost of your mortgage insurance will be. The chart below illustrates what a mortgage insurance premium may be based on the size of a down payment on a $500,000 purchase price:
| Down Payment % | Premium $ | Premium % |
|---|---|---|
| 5% | $19,000 | 3.80% |
| 6% | $18,800 | 3.76% |
| 7% | $18,600 | 3.72% |
| 8% | $18,400 | 3.68% |
| 9% | $18,200 | 3.64% |
| 10% | $13,950 | 2.79% |
| 11% | $13,975 | 2.80% |
| 12% | $13,640 | 2.73% |
| 13% | $13,485 | 2.70% |
| 14% | $13,330 | 2.67% |
| 15% | $11,900 | 2.38% |
| 16% | $11,760 | 2.35% |
| 17% | $11,620 | 2.32% |
| 18% | $11,480 | 2.30% |
| 19% | $11,340 | 2.27% |
This is a fairly accurate representation of what your premium will look like based on the size of your down payment.
How to pay mortgage insurance premium?
Normally, the mortgage insurance is financed along with your mortgage; the premium is added to the difference of purchase price less your deposit, this is what constitutes the amount you will borrow in the form of a mortgage (see Example 1). You aren’t required to pay a lump sum amount when you purchase your home. Rather, your mortgage default premium is simply added to your mortgage amount and paid off over the lifespan of your loan. Your mortgage broker will include the premium in your mortgage application, so there’s not much that needs to be done on your end.
How do I “get rid” of mortgage insurance?
The only way to “get rid” or minimize the cost of your mortgage default insurance is to increase the size of your down payment as a percentage relative to the price of your home at the time of purchase. There are two ways you can achieve this, the first being increasing the amount you put down for a down payment, the second being purchasing a less expensive home.
Regarding the first option, you can increase the size of your down payment by considering other sources like a gift from a relative or even via a tax withdrawal from your Registered Retirement Savings Plan as part of the RRSP Home Buyers’ Plan.
How Mortgage Maestro can help
Mortgage Maestro has a team of mortgage experts with more than 50 years of combined mortgage, financing, and business experience. Our agents provide unbiased financial advice, and we can help you find the best mortgage and default insurance rates using our extensive network lenders. We will do the research and all the heavy lifting for you and make sure you find the best possible solution at the best price.
Contact us today and we’ll have a mortgage professional assigned to you immediately.