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Mortgages

What is Mortgage Default Insurance?

May 5, 2023
4
min read

You’ve budgeted for closing costs and property taxes. But before you buy a home, you may need to cover another expense: Mortgage default insurance.

Man and woman viewing condo with realtor

Trying to save up a down payment? You can buy a home with a down payment of just 5%—but if you do, you’ll need to purchase mortgage default insurance.

This insurance protects your mortgage lender in case you can’t make your mortgage payments. The cost of the insurance is paid by you, the home buyer.

Even though you’re paying for your lender’s insurance, you still benefit from it—because this is what allows you to buy a home with a down payment of less than 20%.

Without this insurance, you’d need to save up more money before you could purchase a house (or pay higher interest rates for a high-risk loan).

We’re exploring how much your mortgage default insurance might cost—and how you can avoid paying it altogether:

What does mortgage insurance cover?

If you can no longer make your mortgage payments—whether that’s due to illness, disability, or job loss—mortgage insurance will cover your lender for those losses.

This means that your financial institution won’t lose money if you default on your mortgage. In turn, they’re more likely to loan you money to buy a home, even if you have a smaller down payment.

Keep in mind that even with this insurance, you still need to make your mortgage payments—the insurance only protects your lender.

How does mortgage insurance work?

The companies that offer this insurance in Canada are:

  • Canada Mortgage and Housing Corporation (CMHC)
  • Genworth Financial
  • Canada Guaranty

CMHC is a Crown corporation, while Genworth Financial and Canada Guaranty are both private insurance companies.

Your insurance premium rate will vary based on your down payment. The bigger your down payment is, the less your insurance will cost.

Example:

If you have a down payment that covers 10% of the home’s total value, your mortgage insurance premium rate would be 3.10%.

If your down payment covered just 5%, your rate would increase to 4%.

You can view the full list of rates on the CMHC website.

How much does mortgage insurance cost?

You can pay your premiums in full upon the purchase of your home or add them to your mortgage payments each month.

Let’s look at how mortgage insurance premiums are calculated:

Example:
You buy a home for $350,000 with a down payment of $50,000.

Given that your down payment is 14.3% of the home’s total value, your insurance premiums will be 3.10%.

$350,000 - $50,000 = $300,000. This is your total loan amount.

$300,000 x 3.10% = $9,300.

Your total insurance premiums are $9,300.
Tax tip: As of 2020, in Manitoba, you no longer need to pay provincial sales tax (PST) on your mortgage insurance premiums.

Is mortgage insurance mandatory?

Yes. In Canada, you’re required to purchase mortgage default insurance if you’re buying a home with a down payment of less than 20%.

But there are a few exceptions:

  • If you’re buying a home with a value of $1,000,000 or more, it will not be eligible for mortgage default insurance. That means you need to put at least 20% down on the home.
  • The mortgage amortization period (the time it takes to pay back your mortgage) cannot be longer than 25 years.
  • If you’re buying a commercial investment property rather than a primary residence, you’ll need a down payment of 20%. Therefore, no mortgage insurance is necessary.

How to avoid CMHC mortgage insurance

Owning a home already comes with plenty of unexpected costs. You want to lower your expenses wherever you can. So, how can you avoid CMHC fees?

If your down payment covers 20% or more of the home’s value, you do not need to purchase mortgage default insurance.

But in some cases, your financial institution may still require you to buy mortgage insurance even if you put 20% down. This might happen if you have a low credit score or are self-employed.

Common misconceptions about mortgage insurance

Given how complex home ownership can be, we wanted to clear up a few common misconceptions about mortgage insurance:

  • It is different from home insurance. Home insurance helps you pay for unexpected expenses, like property damage, a house fire, or stolen belongings.
  • It is different from mortgage life insurance. If you pass away suddenly or become ill, your debt may be passed on to your loved ones. Mortgage life insurance (or mortgage protection insurance) will cover the remaining balance of your loan to protect your family. Ask your financial institution about this coverage when you’re applying for a mortgage.
  • You are still responsible for making missed mortgage payments. This insurance protects your lender if you miss payments. You are still on the hook for making those payments.

Get a Cash Back Mortgage with Cambrian today

One way to make your mortgage more affordable? Take advantage of Cambrian’s Cash Back Mortgage. You can get up to $3,500 Cash Back depending on your mortgage balance and the mortgage term you select.

To learn more about Cambrian Credit Union mortgage rates, contact us today!

Today’s Rates

*All rates and yields subject to change without notice.
5 Year Variable Closed Mortgage
5.80
%
Variable Open Mortgage
6.70
%
5 Year Fixed Closed Mortgage
5.25
%

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Our goal is to make complex topics like this one, simple.

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