Saving for a sufficient down payment is one of the largest obstacles faced by first-time home buyers across Canada. Fortunately, mortgage default insurance enables borrowers to qualify for mortgages with less money down. The minimum down payment requirement in Canada is 5% for the first $500,000 and 10% for any portion above that threshold.
Mortgage default insurance is required for all mortgages with down payments of less than 20%. The insurance represents a security for your lender and protects them in case you’re unable to make your mortgage payments.
Important: Don’t confuse mortgage default insurance with mortgage life insurance – a product that protects you and your loved ones by paying off the mortgage in the event that you become ill or pass away and can’t make payments
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Which providers offer mortgage default insurance?
Mortgage default insurance is often referred to as ‘CMHC insurance’ because government-owned Canada Mortgage and Housing Corporation (CMHC) is one of three mortgage default insurance providers across Canada. There are also two private mortgage default insurance companies in Canada – Genworth Financial and Canada Guaranty.
How to qualify for mortgage default insurance
To be eligible for CMHC insurance coverage after July 1st, 2020, borrows are now required to meet the following criteria:
- Gross Debt Service ratio less than 35
- Total Debt Service ratio less than 42
- Credit score at least 680
- Must not borrow money for down payment
Private mortgage insurers Genworth Financial and Canada Guaranty didn’t follow suit with CMHC changes, which means it’s easier to qualify for their mortgage default insurance offerings. Borrowers must meet these terms:
- Gross Debt Service ratio minimum 39
- Total Debt Service ratio minimum 44
- Credit score minimum 600
Tip: Private mortgage insurers Genworth Financial and Canada Guaranty didn’t follow suit with stricter CMHC changes on July 1st, 2020, which means it’s now easier to qualify for the private mortgage default insurance offerings
Only homes valued at less than $1 million are eligible for mortgage default insurance. So, if you’re purchasing a more expensive home, be prepared to come up with at least a 20% down payment.
How to calculate mortgage default insurance rates
Mortgage default insurance is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total home purchase price and amount that you borrow, the higher percentage you’ll pay in insurance (ranging between 2.8%-4% of the total mortgage amount).
|Loan-to-Value||Premium on Total Loan|
|Up to and including 85%||2.80%|
|Up to and including 90%||3.10%|
|Up to and including 95%||4.00%|
How do you pay mortgage default insurance?
Mortgage insurance is either payable upon closing or it can be rolled into your monthly mortgage payments. This second option makes it subject to interest, so it’s important to make sure you understand what each option involves from a financial perspective.
Mortgage default insurance costs borrowers 2.8%-4% of the mortgage amount which, in turn, allows Canadians who may not otherwise be able to purchase homes, to become homeowners.
Without this insurance, mortgage rates would be higher, as the risk of default would increase. Lenders are able to offer lower mortgage rates when mortgages are protected by mortgage default insurance because the risk of default is passed along to the mortgage insurer.
Important: Mortgage insurance is either payable upon closing or it can be rolled into your monthly mortgage payments. This second option makes it subject to interest, which will cost you more over time
How to minimize mortgage default insurance payments
If you make a down payment that is at least 20% of the home’s value, you aren’t required to pay mortgage default insurance.
The only way to minimize mortgage default insurance payments is to either make a larger down payment or buy a less expensive home. That’s because, as mentioned above, mortgage default insurance is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total home purchase price and amount that you borrow, the higher percentage you’ll pay in insurance.
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