Do You Need Mortgage Default Insurance?

Contribution from loanscanada.ca

From square footage to financing, there’s loads to consider when buying a new home. Besides planning for a big yard for your kids and their labradoodle, insurance is a priority too.  

One type of insurance that some Canadian families need is mortgage default insurance, which is mandatory when making a smaller down payment on your new home.  

Not everyone needs to pay for mortgage default insurance—in fact, only certain homeowners have to budget for this extra expense. 

If you do have to pay for it, this additional cost will help you qualify for a mortgage when you can’t make a larger down payment and give you the boost to move into your family’s new dream home sooner rather than later.

Keep reading to find out if you need mortgage default insurance and, if you do, how much it might cost you.

What is mortgage default insurance?

Mortgage default insurance is mandatory when a homebuyer takes out a mortgage with a down payment that’s less than 20% of the purchase price. 

For example, if your home costs $500,000, and you make a down payment of 10% (that’s $50,000), you will have to pay mortgage default insurance. 

If you default on your mortgage payments, it’s important to understand that the premiums for this policy protect the lender’s financial losses, and not yours. 

It’s important to note, however, that mortgage default insurance is different than mortgage life insurance, which is a type of life insurance sold by your bank or mortgage broker. If you’d like to learn more about that, check out our comprehensive guide on mortgage life insurance.

Will you need to pay for mortgage default insurance? We’ve created this simple chart to help you find out. 

Chart detailing if you will need to pay for mortgage default insurance

What is the loan to value ratio (LTR)? 

Before we go any further, let’s examine the math behind the Loan to Value Ratio (LTR), which is the loan amount relative to the value of a home. 

This ratio helps lenders determine if you need mortgage default insurance

Premiums paid by every borrower with an elevated LRT give lenders the financial cushion they need to cover the time, costs, and headaches—such as legal fees, unpaid interest, and the balance owing on the home—in case a borrower defaults on their mortgage. 

There’s a lesson to learn from lenders who are busy protecting their investments: you should protect your home, your largest investment and your family too.

With a term life insurance policy, your mortgage will be paid and loved ones will be gifted with a financial safety net in the event you pass away. Luckily, life insurance doesn’t need to zap your cash flow, which you really need when moving into a new home.

It’s our job to win you financial peace of mind without digging into your backyard pool fund. In just a few clicks, you can see how little you need to spend to get started.

How does mortgage default insurance work?

Mortgage default insurance premiums are added to your monthly mortgage payment when you make a down payment that’s less than 20% of the purchase price of your home. 

The amount you pay depends on the size of your down payment.

When you’re making mortgage payments on time, the lender doesn’t need to reach into their mortgage default insurance policy. 

But if you miss payments and stop paying your mortgage, your financial provider can rely on the mortgage insurance policy to recoup the money you owe them.

How much is mortgage default insurance?

Two numbers come into play to calculate your mortgage default insurance cost: Your insurance rate multiplied by your loan amount. 

Your mortgage insurance provider establishes your mortgage default insurance cost, and that fee depends on the size of your down payment. 

Generally speaking, the lower the down payment, the higher the rate, making your premiums more expensive. 

We tapped into The Canadian Mortgage and Housing Corporation’s online calculator to give you a snapshot of what to expect when it comes to the cost of your premiums: 

Down payment Premium rate
5% 4%
25 $20.54
5.01% - 10% 3.10%
10.01% - 15% 2.80%
15.01% - 20% 2.40%
20.01% - 25% 1.70%
***The minimum down payment is 5% for a purchase price of $500,000 or less. The minimum down payment is 5% for the first $500,000 and 10% for the remaining portion when the purchase price is above $500,000.

To learn about different types of mortgages, read more: Fixed vs Variable Mortgages in Canada

A real-life mortgage story: Meet Lauren

Lauren is a mom with two young kids and a labradoodle making a 5% down payment on a new $700,000 home.

Image of adult woman and two children holding brown dog for article about mortgage default insurance

After her down payment, she needs a mortgage of $665,000. Based on the chart above, a 5% down payment means she will be charged an insurance rate of 4.00% on her $700,000 home purchase. 

When calculated with the outstanding loan amount of $665,000, her insurance premium would be $26,600, which is added to her loan amount, bringing her final mortgage total to $691,600.

She would then have to repay $691,600 over the entire amortization period, plus interest.

Paying for your mortgage default insurance

Mortgage insurance premium payments are typically rolled into the cost of the mortgage and paid back over the life of the loan. 

Conveniently, every mortgage payment you make will include a portion that pays for the mortgage default insurance premium.

Minimizing mortgage default insurance

If you want to avoid paying mortgage default insurance or simply don’t have the monthly cash flow to afford it, the only way out is to make a down payment that’s at least 20% of the purchase price.

The quickest route to making a bigger down payment is to purchase a more affordable home so your hard-won savings can cover 20% or more of the cost. 

If you can’t live without the perfect location or extra-large backyard, you might want to put your new house on hold until you have savings that equal 20% or more of your dream home’s sticker price. 

If you can’t sidestep paying this insurance premium, the only way to minimize your payments is to boost your down payment amount relative to the cost of the home. And there are two ways to do this: 

1. First-time homebuyers can look into borrowing against their RRSPs through the Home Buyers' Plan (HBP) 

2. If you’re moving to another home, ask your mortgage default insurance provider about a “portability option,” which can help maintain, reduce or eliminate the premium on your new home’s loan. 

Mortgage default insurance providers in Canada

Only three institutions provide mortgage default insurance in Canada: The Canada Mortgage and Housing Corporation (CMHC is a crown corporation and the most popular provider) and private insurers, Genworth Financial and Canada Guaranty. 

Mortgage default insurance by province

With only a handful of providers, the cost for mortgage default insurance premiums doesn’t vary much from province to province either.

However, if you live in Ontario, Manitoba or Quebec, there’s one extra closing cost you have to pay when you require mortgage default insurance. You will have to pony up provincial sales tax on the total amount of premiums you pay over the life of your loan. It’s a compulsory fee that has to be paid upfront before taking possession of your home. 

The tax rate varies depending on where you live and we’ve calculated this cost using our real life mortgage story featuring Lauren, her $700,000 home and $26,600 total insurance premium as an example.  

Mortgage default insurance in Ontario

Mortgage default insurance in Manitoba

Mortgage default insurance in Quebec

The bottom line: mortgage default insurance is required for some families

Paying another insurance premium can be a pain. But it's a necessity if you’re unable to come up with at least 20% down on your new home.

That said, paying this premium means you can stop paying rent and get on the property ladder as soon as you have enough savings for a down payment. 

The upside is that it’s still possible to lower your premiums so that you're not stuck paying more than you have to throughout your loan’s term. 

We believe in empowering Canadian families with dependable knowledge that prioritize your family’s best interest, so that you can feel confident that you’re making the right decisions. Like getting the right insurance for your new home or life insurance to protect your loved ones’ future. 

With our online process, you can select your own policy terms, without the hassle of upselling. Our promise is to never pressure or upsell more coverage than you require.

We'll even tell you if you don't require life insurance.

Caitlin Wood

About the Author

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