Mortgage default insurance, commonly referred to as CMHC insurance, is mandatory in Canada for down payments between 5%, the minimum in Canada, and 19.99%. Mortgage default insurance, protects lenders if a home owner defaults on their mortgage.
Though mortgage default insurance costs home buyers 1.75% - 2.95% of their mortgage amount, it is actually beneficial to the buyer market. Without it, mortgage rates would be higher for low down payment percentages, as the risk of default increases. Lenders are able to offer lower mortgage rates when mortgages are supplemented with mortgage default insurance as the risk is spread across multiple home buyers through mandatory insurance.
.In Canada, mortgage default insurance is provided by CMHC (Canada Mortgage and Housing Corporation), Genworth Financial and Canada Guaranty Mortgage Insurance.
The mortgage default insurance premium is calculated as a percentage of the total mortgage amount. The percentage applied varies based on the size of your down payment and the length of your amortization period as follows:
| Amortization period | Downpayment (% of home price) | |||
|---|---|---|---|---|
| 5% - 9.99% | 10% - 14.99% | 15%-19.99% | 20% or higher | |
| 31-35 years |
N/A | N/A | N/A | 0.00% |
| 26-30 years |
2.95% | 2.20% | 1.95% | 0.00% |
| 25 years or less | 2.75% | 2.00% | 1.75% | 0.00% |
Source: Canada Housing and Mortgage Corporation (CMHC)
Let's say have just purchased a $300,000 home and have saved $40,000 for a down payment. You have decided to pay off your mortgage over the course of 29 years. Your insurance would be calculated as follows:
| Step 1: Calculate your down payment as a % of your home price |
$40,000 / $300,000 = 13.33% |
| Step 2: Factor in your amortization period |
Amortization period is between 26 and 30 years |
| Step 3: Find your insurance premium percentage in the chart |
Insurance premium percentage is 2.20% |
| Step 4: Calculate your mortgage amount |
$300,000 - $40,000 = $260,000 |
| Step 5: Calculate your mortgage insurance premium |
$260,000 * 2.20% = $5,720 |
Mortgage default insurance is financed through your mortgage. Unlike closing costs such as lawyer fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Your insurance premium is added to the value of your mortgage, and your monthly payment increases accordingly. Continuing with the above example, the revised mortgage amount would be $260,000 + $5,725, = $265,725.
There are essentially two ways to minimize mortgage default insurance:
1. Increase your down payment (as a percentage of your home price) or
2. Decrease your amortization period
If you want to increase your down payment as a percentage of your home value, you will either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time home buyer, a tax-free loan from your RRSP.
As your amortization period also affects your mortgage default insurance premium, you may want to consider shortening the period if you can afford to do so. This of course will increase your monthly mortgage payments, but decrease the total interest paid over the life of the mortgage as well. For amortization periods between 26-30 years you will pay a 0.2% insurance premium and for periods of 31-35 years you will pay a 0.4% insurance premium, compared to an amortization period of 25 years or less.
For home buyers using non-traditional sources for their down payment, their insurance premiums will increase if their down payments are between 5 and 9.99%, as shown in the chart below.
| Amortization period | Down payment (% of home price) | |||
|---|---|---|---|---|
| 5% - 9.99% | 10% - 14.99% | 15%-19.99% | 20% or higher | |
| 31-35 years |
N/A | N/A | N/A | 0.00% |
| 26-30 years |
N/A | 4.95% | 3.10% | 0.00% |
| 25 years or less | N/A | 4.75% | 2.90% | 0.00% |
Source: Canada Housing and Mortgage Corporation (CMHC)
Self-employed individuals without 3rd-party income validation also face higher insurance premiums. The minimum down payment required to even obtain insurance is 10%, and premiums on down payments between 10%-19.99% are higher compared to standard applicants.
| Amortization period | Downpayment (% of home price) | |||
|---|---|---|---|---|
| 5% - 9.99% | 10% - 14.99% | 15%-19.99% | 20% or higher | |
| 31-35 years |
N/A | N/A | N/A | 0.00% |
| 26-30 years |
2.95% | 2.20% | 1.95% | 0.00% |
| 25 years or less | 2.75% | 2.00% | 1.75% | 0.00% |
Source: Canada Housing and Mortgage Corporation (CMHC)
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| Main Branch: 255 Duncan Mill Road, Unit 702 Toronto ON, M3B 3H9 | Tel: 416.222.3222 Fax: 416.222.3228 |
| Mississauga Branch: 333 Dundas Street, E. Suite#210 Mississauga, Ontario, L5A 1X1 | Tel: 905.232.7575 Fax: 905.232.7574 |