What Is Mortgage Default Insurance?

Mortgage default insurance—commonly referred to as CMHC insurance—is a type of insurance required when a homebuyer has a down payment of less than 20% of the purchase price. It protects the lender (not the borrower) in case the borrower defaults on their mortgage.

In Canada, it is mandated by law for high-ratio mortgages (where the loan-to-value ratio exceeds 80%). It allows lenders to offer lower down payment options while managing their risk.

How Does Mortgage Default Insurance Work?

• When It’s Required:
  • If your down payment is less than 20% of the home’s purchase price, you’ll need mortgage default insurance.
  • Homes priced at $1,000,000 or more are not eligible for mortgage default insurance—you must have a minimum 20% down payment for these properties.
• Who Provides It?:
  In Canada, there are three main providers of mortgage default insurance:

1. Canada Mortgage and Housing Corporation (CMHC).
2. Sagen (formerly Genworth Canada).
3. Canada Guaranty.

How Is the Premium Calculated?

The premium is based on the size of your down payment and is expressed as a percentage of the mortgage amount.
Here’s an example of the premium structure:

• 5% to 9.99% down payment: 4.00% of the mortgage amount.
• 10% to 14.99% down payment: 3.10% of the mortgage amount.
• 15% to 19.99% down payment: 2.80% of the mortgage amount.

The premium is added to your mortgage balance and paid off as part of your regular mortgage payments.

Example:

• Purchase price: $500,000.
• Down payment: 5% ($25,000).
• Mortgage amount: $475,000.
• Premium: 4% of $475,000 = $19,000.
• New mortgage amount: $494,000 (including the premium).

PST on the Premium

While the premium can be added to your mortgage, the Provincial Sales Tax (PST) on the premium must be paid upfront in some provinces, including Ontario.

• In the example above, PST (8%) on $19,000 = $1,520, which you would pay at closing.

Benefits of Mortgage Default Insurance

1. Lower Down Payment Requirement:
   Allows homebuyers to purchase a home with as little as 5% down.
2. Lower Interest Rates:
   Insured mortgages are less risky for lenders, so they often come with lower interest rates.
3. Access to Homeownership:
   It makes homeownership more accessible for first-time buyers or those with limited savings.

When It’s Not Required

• If your down payment is 20% or more, you won’t need mortgage default insurance.
• For homes priced over $1,000,000, you’re required to provide at least a 20% down payment, and insurance is not available.

How I Can Help

As a mortgage broker with over 23 years of experience helping clients in Hamilton, Ancaster, and across Ontario, I’m here to guide you through every step of the process. I’ll:

• Help you understand whether you need mortgage default insurance.
• Explain how the premium impacts your overall mortgage costs.
• Find lenders offering competitive rates, whether your mortgage is insured or not.

Key Takeaway

Mortgage default insurance makes it possible to buy a home with less than a 20% down payment, but it comes with additional costs. If you’re unsure how this fits into your budget or financial goals, let’s connect! I’d be happy to help you navigate your options and find the best solution for your situation.

Call me at: 905-929-1199
Email me at: lamalfi@tmacc.com