Mortgage insurance, also called mortgage default insurance or mortgage loan insurance, is a policy that protects your lender if you default on your mortgage payments. In Canada, having mortgage insurance is mandatory when your down payment is under 20% of your home's purchase price. Cost of coverage is between 0.60% and 4.50% of your mortgage, depending on your down payment. Most buyers add mortgage insurance premiums to their home loan and pay it off over time.

Three companies provide mortgage insurance in Canada: the Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation, and two private insurers, Sagen and Canada Guaranty. All providers charge the same rates, so your lender's choice of insurer doesn't change your cost of coverage.

Don't confuse mortgage insurance with mortgage life insurance, which is optional coverage that pays off your mortgage if you die or become disabled and are unable to fulfil your debt obligations.

Is mortgage insurance worth it?

For most homebuyers who can't reach the 20% down payment, yes, mortgage insurance is worth it, because the alternative is an inability to purchase a home. It's worth knowing your tradeoffs. Here are calculations on a $700,000 property purchase.

The upside:

• You can buy a home sooner. On a $700,000 home, 20% down is $140,000. But if you buy mortgage insurance protection, your minimum down payment reduces to $45,000: 5% on the first $500,000 of the home's purchase price + 10% on the remaining $200,000.
• You get a better rate. Because insurers takes on default risk, lenders tend to offer insured mortgages at rates comparable to conventional ones. CMHC notes that rate savings can cover mortgage insurance premium costs for most borrowers.
• It's a one-time cost. No separate monthly premiums or additional charges as long as you retain your mortgage payments.

The downside:

• It's expensive. With a minimum down payment of $45,000, your mortgage insurance premium is 4% of your home loan, which equates to $26,200 on $655,000 borrowed, before interest. That brings your total mortgage to $681,200.
• You pay interest on it. Most people add the premium to their mortgage, which means paying interest on it for the life of the loan. The total cost is therefore higher than the premium amount alone.
• It doesn't protect you. If your home sells for less than you owe after a default, the insurer covers the lender, not you, and can still pursue you legally for any shortfalls.
• You can't avoid it below 20% down. If you're close to saving 20%, it may be worth delaying your home purchase until you've saved the full down payment.

Read more: Ask the mortgage expert: What a U.S. Fed rate hike could imply for Canadian mortgage rates

How much does mortgage insurance cost?

Mortgage default insurance costs between 0.60% and 4.00% of your mortgage amount, depending on your down payment, or 4.50% with a non-traditional down payment. The less you put down, the higher the cost of insuring your home loan.

For example, here is how the premium changes with the down payment on a $700,000 home:

To see what you'd pay on your own mortgage, check the premiums from each of the three insurers: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty Mortgage Insurance Company.

You can pay the premium as a lump sum upfront or add it to your mortgage. If you add it, you would be charged interest on the premium at the same rate as the rest of your mortgage. 

Ontario, Quebec, and Saskatchewan also charge provincial sales tax on the premium. Unlike mortgage insurance premiums, that tax can't be added to your monthly mortgage payments. Provincial tax on mortgage insurance is paid on closing day, so budget for it alongside legal fees and land transfer tax. In Ontario, provincial tax on $26,200 mortgage insurance amounts to about $2,100.

Who qualifies for an insured mortgage?

A buyer can get an insured mortgage if the home is in Canada, costs less than $1.5 million, and down payment made is at least 5%. Housing costs and total debts of borrower also have to stay below set limits compared to income. These are CMHC's general requirements:

The home

• Location: It must be in Canada.
• Price limit: It must cost less than $1.5 million. For a small rental property, the limit is $1 million.
• Foreign buyer ban: Under the Prohibition on the Purchase of Residential Property by Non-Canadians Act, most foreign buyers cannot legally purchase residential property in Canada, with a few exceptions. The prohibition is currently set to expire on January 1, 2027, unless the federal government extends or replaces it.

The down payment

The minimum down payment is 5% if the price is $500,000 or less. If the price is higher, it's 5% of the first $500,000 and 10% of the rest.

There are two types of down payment:

• Traditional: Savings, money from selling a property, or a gift from a relative that does not have to be repaid.
• Non-traditional: Money from a source with no direct or indirect link to the purchase and sale of the home, such as an unsecured personal loan or line of credit. This only works for 1- or 2-unit homes with a loan-to-value ratio of 90.01% to 95%. The buyer also needs a strong credit management history. Non-permanent residents can't use this option.

Amortization period

Insured mortgages generally have a maximum amortization of 25 years. A 30-year amortization is available to first-time homebuyers (on new or existing homes) and to buyers of newly built homes. A longer timeframe lowers your monthly payments but adds a 0.20% surcharge to your borrowing costs (total home loan) and increases total interest paid. On a $700,000 home with the minimum down payment, the surcharge would raise your total mortgage insurance to $27,510 from $26,200.

Income and debt limits

Lenders check two ratios, both based on gross household income.

CMHC has a form to calculate both ratios.

Closing costs

Buyers also need cash for closing costs, which CMHC puts at 1.5% to 4% of the home purchase price. Many first-time buyers are surprised by them. They include legal fees, land transfer tax (where it applies), GST or PST, and other adjustments. CMHC has a worksheet to estimate your total costs.

Read next: Does debt affect how much mortgage you qualify for in Canada?

How to lower your mortgage insurance premium

There are several ways to lower the cost of CMHC mortgage insurance: put more money down, choose a 25-year amortization, buy an energy-efficient home, port the mortgage when moving, or buy a cheaper home.

• Put more money down. A bigger down payment means a smaller mortgage. That can save thousands of dollars in interest on your mortgage and mortgage insurance.
• Choose a 25-year amortization. Buyers who are eligible for a 30-year amortization can skip the 0.20% extra charge by choosing 25 years, which also reduces the interest paid over the life of the loan. Monthly payments will be higher, so only choose this if you can afford to pay more for your housing expenses every month.
• Buy an energy-efficient home. CMHC's Eco programs refund 25% of the mortgage insurance premium when a buyer buys, builds, or renovates an energy-efficient home.
• Port the mortgage when moving. If the next home is bought within six months of the first closing, CMHC credits the full premium already paid toward the new one. This credit drops to 50% after 12 months and 25% after 24 months.
• Buy a cheaper home. A smaller mortgage requires a smaller mortgage insurance premium.

Mortgage insurance is mandatory when you're buying a home with less than 20% in down payments. It adds a real cost, but it gets many buyers into a home years earlier than if they had to save 20%. Get quotes from CMHC, Sagen, and Canada Guaranty before committing, and set aside cash for closing costs.

Learn more: Nearly half of Canadians renewing mortgages spend over 50% of their budget on housing

Frequently asked questions (FAQ)

How much does mortgage insurance cost in Canada?

It costs between 0.60% and 4.00% of the mortgage amount, depending on your down payment, or 4.50% with a non-traditional down payment. The less you put down, the more mortgage insurance could cost you.

Is mortgage insurance mandatory in Canada?

Yes, mortgage insurance is mandatory in Canada for any down payment under 20%. A buyer with 20% down typically doesn't need it.

What is the minimum down payment for an insured mortgage?

It is 5% if your home costs $500,000 or less. If purchase price of your home is higher, it is 5% of the first $500,000 and 10% of the rest. Your home must also cost less than $1.5 million.

How can mortgage insurance premiums be lowered?

To lower mortgage insurance premiums, put more money down on your property purchase, choose a 25-year amortization, buy an energy-efficient home, port the mortgage when moving, or buy a cheaper home.

Can you get a 30-year insured mortgage in Canada?

Yes, if you're a first-time homebuyer or you're buying a newly built home, you qualify for a 30-year insured mortgage. A 30-year amortization adds a 0.20% surcharge to your mortgage insurance premium.