How Does Mortgage Default Insurance Work?
What You Should Know
- You'll need to pay for mortgage default insurance if you make a down payment of less than 20%.
- It's a one-time cost that is based on your total loan amount, ranging from 0.60% to 4.00%.
- There are requirements, such as a credit score of at least 600, a maximum amortization of 25 years, and a maximum purchase price of $1 million.
- The main mortgage default insurance provider in Canada is the CMHC, with Canada Guaranty and Sagen as private alternatives.
How Does Mortgage Default Insurance Work?
In Canada, mortgages with a down payment of less than 20% are required to have mortgage default insurance. It’s sometimes called “CMHC insurance” or even just “mortgage insurance”, and it can affect your mortgage’s cost and eligibility requirements. This page will take a look at how mortgage default insurance works, how much it costs, and who provides mortgage insurance in Canada.
What is Mortgage Default Insurance?
Mortgage default insurance covers your mortgage lender should you default on your mortgage. If you cannot repay your mortgage, then mortgage default insurance protects your lender from losses. Mortgage default insurance does not protect you or help you make mortgage payments.
The Government of Canada, through the Office of the Superintendent of Financial Institutions (OSFI), requires mortgages with a down payment of less than 20% to have mortgage default insurance. That’s because the low down payment means there is a greater risk should the borrower not be able to repay their loan. These types of loans with a loan-to-value above 80% are also called high-ratio mortgages.
Down payment is the amount of money that you’re paying upfront when you purchase a home in Canada. The minimum down payment allowed in Canada is 5% of the purchase price, although this requirement can vary depending on the mortgage and property type. For example, the down payment required for a second home as a rental property is 20%.
For a typical mortgage, if you’re looking to make a down payment of less than 20%, expect to need to pay for mortgage default insurance. This will allow you to make a down payment of as little as 5%, depending on the purchase price.
How Mortgage Default Insurance Works
If you need mortgage default insurance, your mortgage lender will arrange this for you. The most common mortgage insurance provider is the Canada Mortgage and Housing Corporation (CMHC), which is a federal Crown Corporation. However, your lender may also choose to go with a private mortgage default insurance provider. Different providers may have different requirements in order to be eligible for coverage. You may ask your lender for a preferred insurer, if you wish.
When it’s time to pay, your lender will be the one paying the mortgage default insurance premiums to the insurer. However, that doesn’t mean that you won’t be paying for it later! The lender will usually pass this cost to you, either by adding it to your regular mortgage payments or by having you pay it upfront as a lump-sum amount. If you do add the premium to your mortgage balance, this means that you’ll be paying mortgage interest on the premium for the life of your mortgage.
By having an insured mortgage, you’ll now be able to make a smaller down payment on your home. This helps those who have trouble saving up for a down payment, and for those that need down payment assistance. The table below shows the minimum down payment required based on the home’s purchase price for an insured mortgage in Canada.
Minimum Down Payment by Purchase Price
| $500,000 or less | Up to $1 million | Over $1 million | |
|---|---|---|---|
| Minimum Down Payment | 5% | 5% for the first $500,000 10% for the remaining amount | Not eligible for mortgage insurance |
There are some rules to keep in mind. For example, homes with a purchase price of over $1 million are not eligible for CMHC insurance. This means that you will need a down payment of at least 20% if you’re looking to buy a home with a price of more than $1 million. To see a full list of eligibility requirements, visit our page about CMHC mortgage rules.
Mortgage Default Insurance Providers
The three mortgage default insurance providers in Canada are:
Canada Guaranty and Sagen are private companies, while the CMHC is a Crown Corporation owned by the federal government. CMHC insurance is the most common type of mortgage default insurance that you’ll see in Canada.
How Much Is Mortgage Default Insurance?
Mortgage loan insurance premiums in Canada are a one-time upfront cost. That's different from private mortgage insurance (PMI) premiums in the United States, which are an annual premium cost. The amount that you’ll pay, and the premium rate you’ll be charged, is based on the loan-to-value (LTV) ratio of the loan along with the total loan amount being insured.
It’s important to note that the cost of mortgage default insurance is non-refundable. This means that if you are required to pay for CMHC insurance, but then fully pay off your insured mortgage in a few years, you won’t be able to get a portion of the premiums paid back. That’s also different from the U.S., where PMI premiums can be removed after reaching an LTV ratio of 80% or less.
CMHC Insurance Rates
CMHC mortgage loan premiums can be as little as 0.60% for mortgages with an LTV of 65% or less, or as high as 4.00% of the total loan amount for LTVs of 90.01% to 95%. This means that if you make a down payment of 5%, you'll need to pay 4% of the mortgage amount for CMHC insurance!
The premium rates chart below shows the current CMHC insurance rates as of September 2022.
CMHC Mortgage Loan Insurance Premium
| Loan-to-Value (LTV) | Down Payment | Premium (% of Loan) |
|---|---|---|
| 90.01% to 95% | 5% to 9.99% | 4.00% |
| 85.01% to 90% | 10% to 14.99% | 3.10% |
| 80.01% to 85% | 15% to 19.99% | 2.80% |
| 75.01% to 80% | 20% to 24.99% | 2.40% |
| 65.01% to 75% | 25% to 34.99% | 1.70% |
| 65% or less | 35% or more | 0.60% |
Source: CMHC
The table below shows an example of the required down payment and the CMHC premium cost for a $500,000 insured mortgage, based on the upper end of each premium rate range.
Example of CMHC Premiums ($500,000 Mortgage)
| Loan-to-Value (LTV) | Required Down Payment | Premium (% of Loan) |
|---|---|---|
| 90.01% to 95% | $25,000 | $19,000 |
| 85.01% to 90% | $50,000 | $13,950 |
| 80.01% to 85% | $75,000 | $11,900 |
| 75.01% to 80% | $100,000 | $9,600 |
| 65.01% to 75% | $125,000 | $6,375 |
| 65% or less | $175,000 | $2,250 |
Borrowers in Ontario, Quebec, and Saskatchewan will need to pay provincial sales tax on their CMHC insurance premiums. This sales tax will need to be paid upfront, and cannot be added to your regular mortgage payment.
Sagen Insurance Rates
Sagen mortgage insurance rates are similar to CMHC insurance rates. The premium rates chart below shows the current Sagen insurance rates as of September 2022.
Sagen Mortgage Loan Insurance Premium
| Loan-to-Value (LTV) | Required Down Payment | Premium (% of Loan) |
|---|---|---|
| 90.01% to 95% | 5% to 9.99% | 4.00% |
| 85.01% to 90% | 10% to 14.99% | 3.10% |
| 80.01% to 85% | 15% to 19.99% | 2.80% |
| 75.01% to 80% | 20% to 24.99% | 2.40% |
| 65.01% to 75% | 25% to 34.99% | 1.70% |
| 65% or less | 35% or more | 0.60% |
Source: Sagen
Sagen also offers mortgage insurance for self-employed mortgages, second mortgages, investment properties, and even mortgages with a borrowed down payment! Sagen mortgage insurance premiums for these alternative mortgage types are shown below, with rates current as of September 2022.
Sagen Alternative Mortgage Insurance Rates
| Loan-to-Value (LTV) | Second Mortgage Premium (% of Loan) | Vacation Homes Premium (% of Loan) | Self-Employed Premium (% of Loan) | Investment Property Premium (% of Loan) |
|---|---|---|---|---|
| 90.01% to 95% | 4.00% | - | - | - |
| 85.01% to 90% | 4.00% | 4.35% | 5.85% | - |
| 80.01% to 85% | 2.80% | 3.50% | 3.75% | - |
| 75.01% to 80% | 2.40% | 3.15% | 3.30% | 2.90% |
| 65.01% to 75% | 1.70% | 2.55% | 2.60% | 2.00% |
| 65% or less | 0.60% | 1.45% | 1.50% | 1.45% |
Source: Sagen
Canada Guaranty Insurance Rates
Canada Guaranty is a private mortgage insurer that provides mortgage default insurance for conventional mortgages, rental property mortgages, second mortgages, and other mortgage types. The premium rates chart below shows the current Canada Guaranty insurance rates as of September 2022.
Canada Guaranty Mortgage Loan Insurance Premium
| Loan-to-Value (LTV) | Required Down Payment | Premium (% of Loan) |
|---|---|---|
| 90.01% to 95% | 5% to 9.99% | 4.00% |
| 85.01% to 90% | 10% to 14.99% | 3.10% |
| 80.01% to 85% | 15% to 19.99% | 2.80% |
| 75.01% to 80% | 20% to 24.99% | 2.40% |
| 65.01% to 75% | 25% to 34.99% | 1.70% |
| 65% or less | 35% or more | 0.60% |
Source: Canada Guaranty
Canada Guaranty Alternative Mortgage Insurance Rates
| Loan-to-Value (LTV) | Required Down Payment | Premium (% of Loan) |
|---|---|---|
| 85.01% to 90% | 5.85% | - |
| 80.01% to 85% | 3.75% | - |
| 75.01% to 80% | 3.30% | 2.90% |
| 65.01% to 75% | 2.60% | 2.00% |
| 65% or less | 1.50% | 1.45% |
Source: Canada Guaranty
Mortgage Default Insurance Requirements
You’ll need to meet some requirements in order to be eligible for mortgage default insurance. These requirements may also vary by insurer. For CMHC insurance, the requirements are:
- Maximum purchase price of $1 million
- Credit score of at least 600
- Maximum gross debt service ratio (GDS) of 35%
- Maximum total debt service ratio (TDS) of 42%
- Maximum mortgage loan amortization of 25 years
- The down payment cannot be borrowed
Mortgage Life Insurance
Mortgage life insurance, also known as mortgage protection insurance, is used to cover the borrower should they be unable to make their mortgage payments. This will protect you should you lose your job, get into an accident or become disabled, have a critical illness, or pass away. You can learn more, compare mortgage life insurance providers, and view premium costs on our page about mortgage protection insurance in Canada.
Advantages to Mortgage Default Insurance
There are several advantages to having mortgage default insurance, especially if you are a first-time homebuyer. Default insurance allows you to make a smaller down payment, making homeownership more accessible to borrowers. Since the mortgage is insured, it also lowers the risk to lenders. This allows mortgage lenders to offer lower mortgage interest rates for high-ratio insured mortgages. This may reduce your overall cost of borrowing despite the added cost of insurance premiums.
Disadvantages to Mortgage Default Insurance
The main disadvantage to mortgage default insurance is the cost of insurance premiums. While this is an upfront cost, which can be amortized over the life of your mortgage loan, it is still an extra expense that can be avoided by simply making a larger down payment. However, saving for a larger down payment might not be an option for some borrowers, which is where mortgage default insurance comes in.
Being a one-time fee would also make CMHC premiums relatively more expensive if you plan to pay off your mortgage soon, such as if you’re looking to sell your home in the next few years. This can be avoided with mortgage porting if you’re getting another mortgage, but may come with additional costs.