Mortgage Insurance CMHC - a.ka. Mortgage Default Insurance
In order to get a mortgage to buy a home, you’ll have to pay a down payment, that’s at least 5% of the home’s purchase price.
A down payment acts as a form of security to the homeowner and the mortgage lender - so the larger your down payment, the better. If you have a greater amount of equity built up in your home, unforeseen circumstances such as job loss or a drop in home prices can be more easily managed, and you’ll be less likely to default on your mortgage.
Lenders typically group mortgage shoppers with deposits between 5 – 20% of the home purchase price into the “slightly higher risk” category. In order for the lender to protect against this increased risk, mortgage default insurance is required.
In Canada, the minimum down payment for homes priced below $500,000 is 5%. The minimum increases to 10% on a graduated scale for homes priced between $500,000 - $1 million.
For example, if you’re looking to buy a $650,000 home, you will now be expected to pay a minimum downpayment of $40,000 compared to $32,000 under the old rules.
Here’s how the new graduated minimum down payment pricing works:
First $500,000 x 5% = $25,000
Remaining $150,000 x 10% = $15,000
Total: $40,000
The minimum down payment for homes priced $1 million and over is 20%.
What is Mortgage Default Insurance?
Default Insurance, also known as mortgage loan insurance, provides protection to the mortgage lender. The lender typically requires this form of insurance for mortgage loans with a down payment of less than 20%. The lender insures your mortgage loan and then requires you, the homeowner, to pay the insurance premium.
IMPORTANT UPDATE!: As of July 9, 2012, mortgages requiring default insurance are capped at an amortization period of 25 years. This means 30-year mortgages are only a possibility for those putting more than 20 % down (referred to as a conventional mortgage).
In the event that you default on your mortgage, the lender will go through the process of collecting the outstanding amount on the loan (i.e. taking ownership of your home and selling it). If the outstanding loan is still not fully paid off after selling the home, then the insurer will provide the difference back to the lender.
Where Do I Get Mortgage Default Insurance?
This form of insurance is supplied by the government organization Canadian Mortgage and Housing Corporation (CMHC), as well as private insurers including Genworth Financial and Canada Guaranty Mortgage Insurance Company.
What Will It Cost Me?
When the lender insures the loan, they pass the insurance premium to the homeowner. The premium is a percentage of the mortgage value based on your Loan-to-Value (LTV). It can be paid in a single lump sum or it can be added to your monthly mortgage payments.
Typically premiums vary from 0.50 – 2.75% of the mortgage value depending on your LTV and your amortization period. The rates are mainly the same for CMHC, Genworth Financial and Canada Guaranty.
| Loan to Value ratio (LTV) | 25 Year |
|---|---|
| 0% to 80% | 0% |
| 80.01% to 85% | 1.75% |
| 85.01% to 90% | 2.00% |
| 90.01% to 95% | 2.75% |
Note: See your lender for premium surcharges and other terms and conditions that might apply.
Advantages of Having Default Insurance
- It’s a win-win situation for both the lender and potential homeowner as it protects the lender and enables the borrower to purchase a house that might have otherwise been out of their reach.
- It means that the lender can offer that same great mortgage products and rates to borrowers that are at a slightly higher risk of default.
- No insurance premiums are required on loan-to-values less than 80% (i.e. for those who have a down payment larger than 20%), so it encourages homebuyers to save for a larger down payment before getting a mortgage.
Disadvantages of Having Default Insurance
- Allows a homeowner to purchase a property with a small down payment – this means they have little value in their home and they will end up paying more interest on the home loan.
- Although the homebuyer pays the premiums, they get no protection from the insurer. If the homeowner wants protection they need to purchase additional mortgage insurance.
- In Ontario and Quebec you have to pay tax on the premiums and the tax cannot be added to mortgage payments.
