What Is Mortgage Default Insurance? Do I need It?
Video #5 – Do I Need Mortgage Default Insurance When I Transfer The Property Into My Name?
Mortgage default insurance, commonly referred to as Canadian Mortgage and Housing Corporation (CMHC) insurance, is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage default insurance protects lenders if a homeowner defaults on their mortgage. To understand how it is calculated and paid for, watch the video below.
Although mortgage default insurance costs homebuyers 1.75% – 2.75%1 of their mortgage amount, it is actually beneficial to the buyer market. Without it, mortgage rates would be higher, as the risk of default would increase. Lenders are able to offer lower mortgage rates when mortgages are protected by default insurance, as the risk of default is spread across multiple homebuyers.
Who Offers Mortgage Default Insurance?
In Canada, mortgage default insurance is provided by CMHC (Canada Mortgage and Housing Corporation), Genworth Financial and Canada Guaranty Mortgage Insurance.
How Do You Pay Mortgage Default Insurance?
Mortgage default insurance is financed through your mortgage. Unlike closing costs such as lawyer fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Your insurance premium is added to the value of your mortgage, and your monthly payment increases accordingly. Continuing with the above example, the revised mortgage amount would be $260,000 + $5,200 = $265,200.
Mortgage Default Insurance Rates (CMHC Insurance Rates)
The mortgage default insurance premium is calculated as a percentage of the total mortgage amount. The percentage applied varies based on the size of your down payment and the length of your amortization period as follows:
| Amortization Period | Down Payment (% of Home Price) | |||
|---|---|---|---|---|
| 5% – 9.99% | 10% – 14.99% | 15%-19.99% | 20% or higher% | |
| 31-35 years | N/A | N/A | N/A | 0.00% |
| 26-30 years | N/A | N/A | N/A | 0.00% |
| 25 years or less | 2.75% | 2.00% | 1.75% | 0.00% |
Source: Canada Housing and Mortgage Corporation (CMHC)
How Do You Calculate Mortgage Default Insurance?
Let’s say have just purchased a $300,000 home and have saved $40,000 for a down payment. You have decided to pay off your mortgage over the course of 25 years. Your insurance would be calculated as follows:
| Step 1: Calculate your down payment as a % of your home price | $40,000 / $300,000 = 13.33% |
| Step 2: Factor in your amortization period | Amortization period is between 25 years or less |
| Step 3: Find your insurance premium percentage in the chart | Insurance premium percentage is 2.00% |
| Step 4: Calculate your mortgage amount | $300,000 – $40,000 = $260,000 |
| Step 5: Calculate your mortgage insurance premium | $260,000 * 2.00% = $5,200 |
How To Minimize CMHC Insurance
There is one way to minimize mortgage default insurance:
1. Increase your down payment (as a percentage of your home price)
Increase Your Down Payment (as a percentage of your home)
If you want to increase your down payment as a percentage of your home value, you will either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time homebuyer, a tax-free loan from your RRSP.
Mortgage Default Insurance Rates With a Non-Traditional down Payment
For homebuyers using non-traditional sources for their down payment, their insurance premiums will increase if their down payments are between 5 and 9.99%, as shown in the chart below.
| Amortization period | Down payment (% of home price) | |||
|---|---|---|---|---|
| 5% – 9.99% | 10% – 14.99% | 15%-19.99% | 20% or higher | |
| 31-35 years | N/A | N/A | N/A | 0.00% |
| 26-30 years | N/A | N/A | N/A | 0.00% |
| 25 years or less | 2.90% | 2.00% | 1.75% | 0.00% |
Source: Canada Housing and Mortgage Corporation (CMHC)
Mortgage Default Insurance Rates For Self-Employed, Non-Verified Income
Self-employed individuals without 3rd-party income validation also face higher insurance premiums. The minimum down payment required to even obtain insurance is 10%, and premiums on down payments between 10%-19.99% are higher compared to standard applicants.
| Amortization Period | Down Payment (% of Home Price) | |||
|---|---|---|---|---|
| 5% – 9.99% | 10% – 14.99% | 15%-19.99% | 20% or higher% | |
| 31-35 years | N/A | N/A | N/A | 0.00% |
| 26-30 years | N/A | N/A | N/A | 0.00% |
| 25 years or less | N/A | 4.75% | 2.90% | 0.00% |
