When you take out a mortgage default insurance policy, you're paying the insurance provider to give your creditors money in the event you default on your mortgage. This could be because of situations like bankruptcy or death. The premiums you pay are determined by factors such as your down payment and the value of the home.
Use our CMHC calculator to see how much you would have to pay in mortgage default insurance premiums.
Mortgage Default Insurance or CMHC Insurance
What is mortgage default insurance?
Mortgage default insurance is commonly referred to "CMHC Insurance" because the largest provider in Canada is the Canadian Mortgage and Housing Corporation. However, there are two other companies that offer mortgage default insurance as well, Genworth Financial and Canada Guaranty. Even though we call this our CMHC calculator, it’s the same for all three companies. You probably won’t notice a difference when you go to any one of them.
Mortgage default insurance is necessary for down payments of less than 20% of the purchase price of a home. In other words, it allows Canadians who don't have 20% saved for a down payment to enter the real estate market, at an additional cost (spread out over the life of the mortgage). Lenders offer lower rates to insured mortgages because they take on less risk when compared to uninsured mortgages. However, the additional cost of the insurance offsets the lower rate. It is always preferable to bring as high a down payment as possible – not only do you have to finance less money, but you have the option of extending to a 30-year amortization.
To see if you need CMHC insurance (or see how much you’d pay) use our CMHC calculator.
Mortgage Default Insurance Rules
There are a few rules for qualifying for mortgage default insurance.
- The minimum down payment is 5% of the purchase price
- The maximum down payment is 19.99% of the purchase price
- The maximum value of the property is $1 million
- The maximum amortization period is 25 years
- Your GDS shouldn't exceed 32%, and your TDS shouldn't exceed 40%. For more information about GDS and TDS ratios, click here.
If any of this sounds confusing, don’t worry! Our CMHC calculator does all the hard work for you. Just enter your purchase price and down payment amount to see what your CMHC premiums would be.
Mortgage default insurance premiums
Although there are three different companies that offer mortgage default insurance, they all charge the same premiums. Premiums are always calculated as a percentage of the purchase price. The cost is then added to your mortgage or paid up front.
Premium |
Down Payment as a Percentage of Purchase Price |
|||
5 – 9.99% |
10 – 14.99% |
15 – 19.99% |
20%+ |
|
4% |
3.1% |
2.80% |
0% |
|
Paying Mortgage Default Insurance Premiums
If you roll your premium into your mortgage, you'll pay interest on that amount. This will have a comparatively small impact on your monthly payments, but you should be aware of this.If you decide to pay it up front, you'll only need to pay a lump sum on closing day.
Case Study
Imagine you're buying a house worth $500,000. Let's take a look at how different down payment amounts affect how much you have to pay.
|
5% Down |
10% Down |
15% Down |
20% Down |
Home value |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
Down payment $ |
$25,000 |
$50,000 |
$75,000 |
$100,000 |
CMHC premium % |
4% |
3.1% |
2.8% |
0% |
CMHC Amount |
$19,000 |
$13,950 |
$11,900 |
$0 |
Total mortgage amount |
$494,000 |
$463,950 |
$436,900 |
$400,000 |
Total cost of mortgage (before interest) |
$519,000 |
$513,950 |
$511,900 |
$500,000 |
As you can see, paying the minimum 5% down payment is actually quite expensive. If you put $25,000 down, but need insurance for $19,000, your equity is only $6,000 instead of $25,000. In other words, you only have 1% equity when you buy a home with 5% down.