For many Canadians, coming up with a 20% down payment can be a major obstacle. This is where mortgage default insurance comes into play. It allows homebuyers to purchase a home with a down payment as low as 5%, protecting the lender against the risk of default.
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What is mortgage default insurance?
Mortgage default insurance, often referred to as CMHC insurance, protects lenders in the event of a borrower defaulting on a mortgage in Canada. It is mandated by law for mortgages with less than a 20% down payment. Without it, lenders would view these high-ratio mortgages as too risky. Mortgage default insurance reduces the lender’s risk, allowing them to confidently lend and offer preferred rates to insured borrowers.
What does mortgage default insurance cover?
Mortgage default insurance protects the lender, not the borrower. Here’s what it covers if a borrower defaults:
- Insurance pays lenders for losses if the home sale does not fully cover the outstanding loan balance.
- Typically covers principal balance, accrued interest, legal fees and other costs from a sale or foreclosure.
- The insured principal amount cannot exceed the loan origination value based on the property appraisal.
- Covers lenders up to the maximum policy limits under the insured mortgage terms.
- It does not cover borrowers who cannot make payments due to job loss, disability, etc. They need separate mortgage protection insurance. You could choose from mortgage life insurance, mortgage disability insurance, or mortgage critical illness insurance.
While protecting the lender, mortgage default insurance does not free the borrower from the underlying responsibility of repaying their mortgage debt. The borrower remains legally responsible for any mortgage shortfall after the insurance payout.
Who offers mortgage default insurance in Canada?
Canada has three major mortgage insurance providers – CMHC, Sagen, and Canada Guaranty.
The Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency and a Crown corporation wholly owned by the federal government. Established in 1946, it has offered mortgage default insurance products to promote affordable homeownership.
Sagen is Canada’s largest private mortgage insurance provider, formerly known as Genworth Canada. It has been in business for over 40 years, providing lenders with mortgage default insurance, consumer lending services, and application software solutions.
Canada Guaranty, operated in Canada since 2010, provides default insurance on residential mortgages and rental, commercial, and agricultural loans. Canada Guaranty aims to provide flexibility, offer niche products, and simplify the underwriting process.
Among the three providers, CMHC Mortgage Insurance is the most widely used and recognizable. Almost all major banks and mainstream lenders actively promote CMHC insurance to borrowers requiring mortgage default coverage. It also offers programs to assist potential first-time home buyers.
How much does CMHC Insurance cost?
CMHC mortgage insurance comes at a cost and is passed on to the borrower. The insurance premium is calculated as a percentage of the total loan amount and will depend on the size of your down payment.
| Loan-to-Value Ratio | Premium |
| Up to and including 65% | 0.60% |
| Up to and including 75% | 1.70% |
| Up to and including 80% | 2.40% |
| Up to and including 85% | 2.80% |
| Up to and including 90% | 3.10% |
| Up to and including 95% | 4.00% |
For example, you purchase a $400,000 home with a 5% down payment of $20,000, so you must borrow $380,000. With less than 20% down, you’ll be required to get CMHC mortgage default insurance. The 5% down payment premium rate is 4% of the mortgage amount. 4% of your $380,000 mortgage is $15,200. This $15,200 CMHC insurance premium will be added to your total borrowing costs. Use our calculator above to know your actual CMHC fee.
How to pay mortgage default insurance premiums
The CMHC premium is a one-time fee added to your total mortgage amount, letting you pay it off over time. However, you will pay interest on the premium over the mortgage term. Unlike home insurance, it does not require an annual renewal. Sales tax is payable on CMHC premiums in Ontario, Quebec, Manitoba, and Saskatchewan.
You can also pay part of the premium upfront and add the remaining balance to your mortgage. This lets you minimize interest costs while conserving funds for closing. Some lenders also let you pay the full premium in cash for your closing costs. This avoids paying interest but requires having the funds readily available.
When determining the best payment method, compare the interest savings from paying upfront versus the costs of financing the premium over 25+ years. Adding the premium to your mortgage may make sense if cash flow is limited.
How to qualify for mortgage default insurance
To qualify for CMHC mortgage loan insurance, you must meet the following key eligibility criteria:
- Purchase price – The property purchase price must be below $1 million to be eligible.
- Minimum down payment – A 5% down payment is required based on the purchase price or appraised value.
- Debt service ratios – Your gross debt service and total debt service ratios must be under 39% and 44%, respectively. This ensures you have sufficient income for mortgage payments and other credit obligations.
- Credit score – A minimum credit score of 600 is required for approval.
- Stable income – You must have sufficient income to support mortgage payments and other debt obligations.
- Owner-occupied – Non-rental properties with up to 2 units (duplex) qualify for CMHC owner-occupied insurance.
- Amortization – Mortgages must have a maximum 25-year amortization period.
Meeting these criteria is necessary but does not guarantee insurance approval. CMHC will also assess your application details, including income sources, assets, liabilities, property valuation and other factors.
How to get CMHC mortgage insurance
When you apply for a high-ratio mortgage, CMHC mortgage insurance must be obtained through an approved lender. Your lender will submit your application details to CMHC and, if approved, obtain a Certificate of Insurance. Here are the 5 steps to getting CMHC mortgage loan insurance:
- Get pre-approved – Talk to your lender to get a pre-approval for a CMHC-insured mortgage based on your down payment, income, credit, and property.
- Apply – Your lender will submit your application and documentation to CMHC for approval and issue a Certificate of Insurance.
- CMHC underwriting – CMHC will evaluate your application against its insurance criteria, which include credit score, debt ratios, stable income, and down payment sources.
- Receive Certificate – If approved, CMHC will provide a Certificate of Insurance to your lender permitting the high-ratio mortgage.
- Closing costs – Your lender will collect the CMHC insurance premium and applicable sales tax as part of your closing costs.
Your CMHC Certificate of Insurance will remain on file and transferable between lenders when you renew your mortgage. As a result, it is good to know what happens if your mortgage renewal is denied.
What are the pros and cons of mortgage default insurance?
There are four critical benefits mortgage default insurance provides in Canada’s housing market:
- Increased affordability: It allows down payments as low as 5%, opening homeownership to more Canadians. This is especially helpful for first-time homebuyers struggling to come up with a large down payment.
- Access to preferred mortgage rates: Insured mortgages often have lower interest rates than those with a 20% or more down payment. This can result in substantial savings over the life of the mortgage loan.
- Protection for lenders: With the risk of default transferred to the insurer, lenders are more comfortable providing mortgages to borrowers with less equity invested upfront.
- Stable housing market: This reduces systemic risk and promotes responsible lending across the mortgage industry, contributing to the stability of Canada’s real estate sector.
While beneficial for many, this insurance comes at an added cost, which should be factored into the home-buying budget:
- Added costs – The insurance premiums add significant one-time fees to your home-buying expenses.
- Loan restrictions – Insured mortgages limit prepayment flexibility and amortization length.
- Stress testing – Insured mortgages require mortgage stress tests at a higher qualifying rate, making approval harder.
- Inflexible terms – Insured mortgages have more rigid loan conditions that cannot be customized.
- Credit impact – A default on an insured mortgage can severely hurt your credit score and borrowing ability.
Before taking on an insured high-ratio mortgage, carefully weigh the pros and cons to ensure it is appropriate for your financial situation.
Alternatives to Mortgage Default Insurance
For home buyers who do not fit CMHC’s criteria, there are some options besides conventional high-ratio mortgage insurance:
- 20% down payment – Bypass insurance requirements altogether by saving a 20%+ down payment for an uninsured mortgage.
- Alternative lenders – Specialized lenders provide alternative mortgages tailored to those who cannot obtain traditional financing.
- Loan programs – Explore bank loan programs such as the National Housing Act or the Affordable Housing Program.
- Private financing – Connect with private mortgage brokerages, investors or hedge funds willing to lend on a deal-by-deal basis.
- Co-sign or guarantee – Ask a family member to co-sign or guarantee the mortgage to supplement your qualifications.
- Sell first, then buy – Sell your current property so you have a larger down payment for your new mortgage.
Consider these options if CMHC does not approve the property purchase insurance.
The bottom line
Mortgage default insurance opens the doors to homeownership by allowing smaller down payments, the advantage of lower interest rates, and increased borrowing power. But it also comes at a cost. Educating yourself will empower you to make a wise and informed decision when purchasing your home.
Ready to start the home-buying process? The mortgage brokers at BestMO can help. Leverage our team’s expertise to make financing easy, affordable and stress-free. Your dream home is within reach!
FAQs about mortgage default insurance
What is the difference between CMHC and private mortgage insurance?
CMHC is a government-backed insurer, while Sagen and Canada Guaranty are private companies. They offer similar premium rates, but CMHC is more widely available.
Where can I get CMHC mortgage insurance?
CMHC insurance is available from banks, credit unions, and other lenders approved under the National Housing Act across Canada.
Why is mortgage default insurance mandatory for under 20% down?
Requiring insurance for high loan-to-value mortgages helps lenders manage risk. It makes home buying accessible for those without large down payments.
When should I pay my CMHC premium - upfront or financed?
Paying the lump sum premium upfront prevents interest costs but requires having the cash. Financing spreads the cost over your mortgage.
Do I qualify for CMHC mortgage insurance with bad credit?
CMHC requires a minimum credit score of 600. With poorer credit, you may need a larger down payment or co-signer to qualify.
Is mortgage default insurance mandatory for used homes?
Yes, insured mortgages are required for any home purchase with less than 20% down, whether a new or resale property.
How much is CMHC insurance on a $750,000 mortgage?
With 10% down, a $750,000 home would require CMHC insurance of 3.1% of the $675k mortgage = $20,925.
Can I cancel CMHC insurance if my home value increases?
No, CMHC premiums are a one-time fee, and the insurance cannot be cancelled even if you gain equity from appreciation.
Article Sources
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