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Mortgage Default Insurance
Mortgage default insurance protects a lender if a borrower stops making payments on a high-ratio mortgage, with a down payment under 20%. It allows qualified borrowers to purchase a home with as little as 5% down. Lenders arrange mortgage default insurance through one of three insurers: Canada Mortgage and Housing Corporation (CMHC), Sagen (GW), or Canada Guaranty (CG).
Mortgage Default Insurance Quick Facts
- Required whenever your down payment is under 20%
- Protects the lender, not the borrower, against default
- Offered by CMHC, Sagen, and Canada Guaranty
- Premium is based on your loan-to-value (LTV) ratio
- Premium can be added to your mortgage or paid upfront
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What Is Mortgage Default Insurance
Mortgage default insurance, also called mortgage loan insurance or high-ratio insurance, protects a lender against loss if a borrower stops repaying a high-ratio mortgage, a loan with less than a 20% down payment. Federally regulated lenders cannot lend more than 80% of a property’s value unless the extra portion is insured, so this insurance is what makes a smaller down payment possible. Three companies underwrite mortgage default insurance in Canada: CMHC, Sagen, and Canada Guaranty.
It is easy to confuse with mortgage life insurance, also called creditor insurance, which pays a benefit if the borrower dies or becomes disabled. Default insurance protects the lender only and not the borrower. But it does allow a borrower with a small down payment access to lower interest rates than what a borrower with a 20% down payment would.
Most buyers meet default insurance at the qualification stage of a purchase, since the premium and the loan-to-value (LTV) ratio behind it affect both the mortgage amount and the total cost of borrowing. It does not apply to refinances or investment properties, and it is not available on homes priced at $1.5 million or more.
Why Mortgage Default Insurance Matters for Mortgages
For borrowers, default insurance is what makes a 5% down payment possible on a home valued up to $500,000, since it removes the lender’s downside risk on the loan. Borrowers still require at least a 10% down payment on the portion of the purchase price exceeding $500,000 but less than $1.5 million. CMHC, Canada’s national housing agency, describes its mandate as supporting access to homeownership through insured lending.
For lenders, the insurance is what allows federally regulated institutions to fund high-ratio mortgages under capital rules that would otherwise block them, and it is also what makes those mortgages eligible for bundling into government-backed securities, a funding source that keeps mortgage capital moving through the system rather than sitting on one lender’s balance sheet.
Ontario (8% PST), Quebec (9.75% QST), and Saskatchewan (6% PST) charge provincial sales tax on the default insurance premium, and that tax must be paid in cash at closing rather than added to the mortgage.
Common Types of Mortgage Default Insurance
Three insurers provide default insurance in Canada, and the differences are more about underwriting than price.
CMHC. Canada’s federal Crown corporation and the only insurer with an explicit government guarantee, CMHC also insures multi-unit rental and commercial properties, a scope the two private insurers do not fully match.
Sagen. Formerly Genworth Canada, this private insurer is often noted for more flexible underwriting on self-employed and non-traditional income files than CMHC applies.
Canada Guaranty. The smallest and newest of the three, founded in 2010 from AIG, it competes on service and turnaround time, since premiums across all three insurers land within a fraction of a percentage point of each other for non-standard underwriting.
For example, a buyer purchases a $500,000 home with a 5% down payment of $25,000. The $475,000 loan needs default insurance because the down payment is under 20%. At a 95% loan-to-value (LTV) ratio, the premium runs about 4% of the loan, or roughly $19,000, which the buyer can add to the mortgage balance instead of paying in cash at closing. However, paid to their lawyer or notary, the borrower should include the provincial sales tax, which in Ontario will require $1,520 at closing.
Common Mistakes and Misunderstandings About Mortgage Default Insurance
- Believing default insurance protects the borrower rather than the lender
- Assuming the borrower can choose which of the three insurers is used
- Confusing it with mortgage life or creditor insurance
- Forgetting that refinances and investment properties are not eligible
- Overlooking the provincial sales tax charged on the premium in Ontario, Quebec or Saskatchewan
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Frequently Asked Questions (FAQ) About Mortgage Default Insurance
What is mortgage default insurance?
Mortgage default insurance is a federally regulated requirement that protects a lender if a borrower defaults on a high-ratio mortgage, with a down payment under 20%.
Who pays for mortgage default insurance?
The borrower pays the premium, usually by adding it to the mortgage balance, even though the insurance itself protects the lender rather than the borrower.
Is mortgage default insurance the same as mortgage life insurance?
Mortgage default insurance and mortgage life insurance are not the same. Mortgage default insurance protects the lender against borrower default. Mortgage life insurance, also called creditor insurance, pays a benefit to cover the mortgage if the borrower dies or becomes disabled.
Do all provinces charge tax on mortgage default insurance?
No, only Ontario, Quebec, and Saskatchewan charge provincial sales tax on the mortgage default insurance premium, paid in cash at closing.
Can I choose my mortgage default insurance provider?
No, your lender selects the default insurer at the time of your home purchase. However, a non-standard application or income verification may require a specific insurer’s underwriting to receive approval.