About Mortgage Default Insurance
Mortgage default insurance is an insurance policy that allows a borrower to purchase a home with less than a 20% down payment.1 In instances where a borrower’s down payment is less than 20%, mortgage default insurance protects federally regulated lenders and is required by Canadian federal law.
Mortgage default insurance is paid by the borrower, and assists in covering the lender if the borrower defaults on the mortgage. There are two ways a borrower can pay for mortgage default insurance, the insurance premium can either be added to the mortgage principal amount and repaid over the same amortization period as the mortgage or paid upfront (as a lump sum).
Applicable sales taxes, including provincial sales tax must be paid separately and cannot be added to the borrower’s mortgage. The lender collects the insurance premium from the borrower, and this is paid to the mortgage insurance provider.
The mortgage default insurance premium is calculated as a percentage of the loan. It is the mortgage insurance provider who will determine the factors used in the calculation and the amount of insurance premium, such as the amount of a borrower’s down payment. The higher the percentage a borrower’s loan-to-value ratio2 is, the higher the percentage a borrower will pay in premiums.
| Values |
95% loan-to-value (5% down payment)
|
90% loan-to-value (10% down payment)
|
|---|---|---|
| Purchase price | $500,000 | $500,000 |
| Down payment | 5% or $25,000 | 10% or 50,000 |
| Mortgage Loan | $500,000 - $25,000 = $475,000 | $500,000 - $50,000 = $450,000 |
| Amortization | 25 years | 25 years |
| Loan-to-value ratio | $475,000 / $500,000 = 95% | $450,000 / $500,000 = 90% |
| Premium | $475,000 x 4.00% | $450,000 x 3.10% |
| Default insurance cost | $19,000 | $13,950 |
| * The example is for illustrative purposes only and the actual mortgage premium rate may differ. | ||
Mortgage default insurance is offered by insurance providers such as Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly known as Genworth Financial Canada) and Canada Guaranty Mortgage Insurance Company (Canada Guaranty). Costs and other requirements associated with mortgage default insurance may vary depending on, but not limited to; property location, changes in property purchase price or appraised value, amortization periods, mortgage refinancing or porting. We do not receive any benefits or payments from any of these insurance providers. You can find additional information about the mortgage default insurance premium and rates on the following websites:
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CMHC:www.cmhc-schl.gc.ca/en
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Sagen:www.sagen.ca
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Canada Guaranty:www.canadaguaranty.ca