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Updated
Whether you are a new homebuyer or not, you must have come across the term mortgage default insurance in your research several times.
Buying a home requires you to be ready with the calculations, in terms of assessing the purchase price of the home, the down payment, mortgage EMI, closing costs, lawyer fees, moving cost, among other expenditures. One such important expense is mortgage insurance, and if your downpayment is less than 20% of the purchase price, it is mandatory for you to add this to your mortgage cost. Your lender pays insurance premium to mortgage loan insurance company on your behalf and in turn passes this cost to you through your mortgage payment.
Mortgage default insurance, or simply, mortgage insurance protects the lender in case the buyer defaults on mortgage payment. If you are buying a home of $500,000 or less with a 5% down payment in Canada, having mortgage insurance is mandatory. Mortgage lenders make this insurance mandatory because a lower down payment (less than 20%) means that your mortgage is for a higher ratio of the purchase price, and lenders consider borrowers with high-ratio mortgages as having a higher risk of default or non-payment.
In Canada, purchasing homes between $500,000 and $1,000,000 requires a down payment of 5% on the first $500,000 and, 10% on the remainder. Houses priced over $1 million require a down payment of at least 20% on the entire purchase price.
There are three mortgage insurance companies which provide this service:
Mortgage insurance is calculated as a percentage of the loan and is based on the size of the down payment. It may range from 0.60% to 4.5% of the mortgage amount. You can use our Mortgage Insurance Calculator to do the math for you!
Mortgage Insurance is calculated on the percentage of the loan and down payment made towards the purchasing property. For instance, the purchasing price of your new home is $500,000 and you pay a downpayment of $25,000, you are making a down payment of 5% of the total mortgage amount. That leaves your lender with 95% mortgage loan-to-value. Your lender will have to pay an insurance premium of 4.00% at this loan-to-value, which works out to be $19,000. The lender will then pass on this cost to you through your mortgage payments.
| Loan to value | Premium on total loan |
|---|---|
| Up to and including 65% | 0.60% |
| 65.01% to 75% | 1.70% |
| 75.01% to 80% | 2.40% |
| 80.01% to 85% | 2.80% |
| 85.01% to 90% | 3.10% |
| 90.01% to 95% | 4.00% |
Source: CMHC
When you input your house purchase price and downpayment in our Mortgage Insurance Calculator, it runs an algorithm that computes your total remaining mortgage and the insurance premium you will have to pay based on the loan-to-value amount. By using our mortgage insurance calculator you are avoiding the hassle and getting accurate results that will help you plan your finances better.
There are many benefits of mortgage insurance, but we can’t ignore the fact that it’s an added cost to your mortgage. Here are a few reasons why mortgage default insurance is good or bad for you:
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