Mortgage default insurance, also known as mortgage insurance or CMHC insurance, is a unique insurance premium you may need to pay if you put down a small down payment on a home. Mortgage insurance is designed to protect your lender if you ever default on your loan. It's not entirely one-sided, though: mortgage insurance allows you to qualify for a mortgage with less than 20% down. This can keep interest rates reasonable even with a low down payment.
CMHC insurance is a common source of confusion among first-time buyers and you may have many questions. Who needs to pay mortgage insurance? How much does it cost? Do I need to pay it up front when I close? Here's how mortgage insurance works and what you can expect to pay.
When Is CMHC Insurance Required?
In Canada, mortgage default insurance is usually a requirement when you put down less than 20% on your home. The premium will be charged to your lender who will pass the cost to you.
There are some requirements you will need to meet to qualify for mortgage insurance:
- Your insured mortgage will be amortized for no more than 25 years.
- You are making a minimum down payment of 5% on a loan of up to $500,000. A 10% down payment on any amount between $500,000 and $999,999 is required.
- Your home's purchase price is less than $1 million.
Are There Benefits to Mortgage Insurance?
While this insurance policy protects the lender from default on the loan, it also offers benefits to borrowers. With rising home prices and stagnant wages, it can be difficult to save for a 20% down payment. Without mortgage default insurance, lenders would be taking an even greater risk when lending to people who put down a low down payment. This would result in higher interest rates and reduced mortgage availability. Mortgage insurance can make it more affordable to buy a home if you don't have a full 20% saved. Thanks to mortgage insurance, qualified borrowers can even buy a home with as little as 5% down.
Mortgage Default Insurance Providers in Canada
There are three mortgage insurance providers in Canada. Despite commonly being called CMHC insurance, the Canadian Mortgage and Housing Corporation (CMHC) is just one provider. The three companies that provide mortgage insurance are:
- Canada Guaranty
- Genworth Financial
- Canadian Mortgage and Housing Corporation
All three providers charge the same premiums for mortgage default insurance.
How Much Does Mortgage Insurance Cost?
The cost of mortgage default insurance will depend on just two factors:
- The size of your down payment
- The size of your mortgage
Mortgage insurance premiums can be as little as 0.50% if you put down 35% on your home or up to 2.75% if you put down just 5%. Mortgage insurance premiums will be higher if you are self-employed, buying an investment or second home, or taking out a second mortgage.
With a standard mortgage, your premium will be the following based on your loan-to-value or down payment:
- 5% to 9.99% down payment: 4.00% premium
- 10% to 14.99% down payment: 3.10% premium
- 15-19.99% down payment: 2.80% premium
- 20% or more down: 0% premium
To calculate the premium you will pay, multiply your mortgage amount by the correct premium rate. For example, if you buy a home for $300,000 and put down $15,000 (5%), your mortgage amount will be $285,000 and your premium rate will be 4% with a total premium of $11,400. That will increase your mortgage to $296,400.
If you put down $45,000 (15%), your mortgage amount will be $255,000. With 15% down, your premium will be 2.80% of $255,000 or $7,140 with a total mortgage of $262,140. If you can increase your down payment by $10,000 to reach 20%, you will avoid the requirement for mortgage insurance. In some provinces, PST is added to CMHC insurance, including Ontario. This is not the case in Alberta.
You can pay your premium upfront or have it included in your monthly mortgage payment. Most people choose to add the CMHC insurance premium to the mortgage amount which increases the amount you need to borrow to buy your home.
Can You Reduce Your Mortgage Default Premium?
Unfortunately, the only way to lower your CMHC premium is by increasing your down payment percentage. There are two ways to accomplish this: putting more money down or buying a less expensive home. Increasing your down payment will probably be the easiest way to pay less for mortgage insurance. If you can't afford to put more down, explore other options.
As a first-time buyer, you can make a tax-free withdrawal from a Registered Retirement Savings Plan (RRSP), for example. In this case, each borrower can borrow up to $25,000 from their RRSP although it must be repaid within 15 years. Two years from your home purchase, you will need to make annual payments to pay back the loan. As long as the money is repaid, it isn't considered an early withdrawal. If you fall behind on payments, you will be taxed on what you didn't pay back.
You can also use a gift from a family member to increase your down payment and potentially save thousands.
Mortgage insurance may help you buy a home with an affordable interest rate when you would otherwise not qualify but it can definitely be expensive. Be prepared for this expense when you're shopping for a mortgage and consider putting off buying a home if you're close to the threshold for a lower premium. You can use a mortgage insurance calculator to see how adjusting the purchase price of your home and/or increasing your down payment can potentially save you thousands upfront and even more over the life of your loan.