Mortgage Default Insurance or CMHC Insurance

Posted by Samantha Prosser on Friday, December 1st, 2017 at 12:29pm.

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Mortgage default insurance, which is 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, in the event a borrower ever stopped making payments and defaulted on their mortgage loan. 

Although mortgage default insurance costs home buyers 2.80% - 4.00% of their mortgage amount, it does allow Canadians, who might not otherwise be able to purchase homes, access to the Canadian real estate market. Without it,  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. 

There are some requirements you have to meet in order to qualify for mortgage default insurance: 

  • The maximum amortization for insured mortgages is 25 years. 
  • If the purchase price is between $500,000 - $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount. 
  • Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% down payment is required on these homes. 

Who offers mortgage default insurance? 

There are three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty. 

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Mortgage default insurance rates (CMHC insurance rates)

To determine which mortgage default insurance premium rate you have to pay, the first step is to calculate how much your down payment is as a percentage of your home’s purchase price. The chart below outlines the premium rates for each down payment scenario: 

Date of PurchaseDown Payment (% of Home Price)
5% - 9.99%10% - 14.99%15%-19.99%20% or higher
Until May 31, 2015 3.15% 2.40% 1.80% 0.00%
As of June 1, 2015 3.60% 2.40% 1.80% 0.00%
As of March 17, 2017 4.00% 3.10% 2.80% 0.00%

Note: These same rates are charged by all three providers: CMHC, Genworth and Canada Guaranty. 

How do you calculate mortgage default insurance? 

Let's say you just purchased a home for $300,000 and made a $40,000 down payment. Your mortgage default insurance premium would be calculated as follows: 

$  300,000 

House Value  

$  40,000 

Down Payment 

25 Yrs 

Amortization 

Step 1 :  Calculate your down payment as a % of your home price 

$40,000 down payment÷$300,000 home value = 13.33% down payment %

Step 2 :  Calculate your mortgage amount 

$300,000 home value$40,000 down payment = $260,000 mortgage amount

Step 3 :  Calculate your mortgage insurance premium 

$260,000 mortgage amount 3.10% insurance premium = $8,060 insurance premium

How do you pay mortgage default insurance? 

Mortgage default insurance is financed through your mortgage. Unlike  closing costs, such as legal fees and  land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060; this is how much you would need to borrow from your lender, in order to purchase your home. 

How to minimize mortgage default insurance 

There is only one way to minimize your mortgage default insurance: increase your down payment as a percentage of your home price. To do this, you 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 withdrawal from your  RRSP.

 

Sourced ratehub.ca

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