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In your rate research you may have come across mortgage rates classified as either “insured” or “uninsured.” There’s a big difference between the two, rate-wise.
For the uninitiated, the insurance being referred to here is mortgage default insurance. Default insurance protects the lender if the borrower defaults. It is required for mortgages where the borrower is putting down less than 20% on a home purchase.
Default insurance can also be purchased by the lender for mortgages with 20% equity or more. Doing this makes the mortgages lower risk, which helps the lender sell that mortgage to investors to generate more capital for future lending.
In some cases, a lender may require the property be default-insured to mitigate risk. That might occur if the property is in a remote location, for example, or if the borrower is qualifying under a special program.
Mortgage default insurance should not be confused with credit life insurance (A.K.A. credit protection insurance or creditor’s insurance). The latter is optional and would pay off some/all of your remaining mortgage balance in the event of death, severe illness, disability or job loss. See more on that here: Credit Life Insurance: Is it Worth it?
Mortgage default insurance, on the other hand, protects the lender in the event the borrower defaults on their mortgage. In that case, the insurer would oversee legal proceedings and payment enforcement and ultimately compensate the lender for any lost interest, lost principal, fees, etc. once the property has been sold.
There are three companies in Canada that sell mortgage default insurance:
| Loan-to-value | Standard purchase 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% of a traditional down payment | 4.00% |
| Up to and including 95% of a non-traditional down payment | 4.50% |
Borrowers requiring mortgage default insurance are bound by certain rules and restrictions. These limits have been introduced by the federal government and regulators over the years. They include:
In July 2020, CMHC changed its underwriting policies related to default-insurance. That made it harder for certain mortgage applicants to qualify at CMHC. The changes involved:
Despite pressure from CMHC, the two private insurers did not adopt these new guidelines, which ultimately cost CMHC market share.
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