Mortgage default insurance protects the lender in the case that you default on your mortgage. Mortgage insurance is typically required in Canada if your down payment is less than 20%. This calculator helps you estimate the premium you will have to pay and how it will impact your home purchase.
What is mortgage default insurance?
Mortgage default insurance protects the lender in the event that the borrower is unable to make payments on their mortgage. This allows lenders to offer mortgages when borrowers have small down payments.
There are three main providers of mortgage insurance in Canada. The first is the Canada Mortgage and Housing Corporation (CMHC) which is often why people refer to mortgage default insurance as CMHC mortgage insurance. The other two providers are Sagen and Canada Guaranty.
What is mortgage default insurance needed?
When your down payment on a home is less than 20% of the purchase price, mortgage default insurance is mandatory. Even with a 20% down payment, lenders may still require mortgage insurance to help mitigate risk.
How is mortgage default insurance calculated?
Mortgage default insurance is calculated based on the loan-to-value (LTV) ratio. This is calculated by taking the loan amount needed and dividing it by the home price.
Loan-to-value (LTV) formula = (Home price - Down payment) / Home price
This loan-to-value percentage corresponds to the rate at which the premium will be calculated. The value of the loan is multiplied by this rate to arrive at the full premium. Some provinces also charge PST on mortgage insurance.
How much does mortgage insurance cost?
The cost of mortgage insurance in Canada depends on the size of the loan and the premium which ranges from 0.60% to 4.00%. Let’s go over the cost of mortgage insurance on a $500,000 home in Canada with a $35,000 down payment.
First we need to calculate the loan-to-value ratio. For this we can use the formula above with $500,000 as our home price and $35,000 as our down payment.
Loan-to-value (LTV) = ($500,000 - $35,000) / $500,000 Loan-to-value (LTV) = 93%
Since our loan-to-value ratio is 93% we will use 4.00% as the premium to calculate mortgage default insurance.
Mortgage default insurance = ($500,000 - $35,000) * 4.00% Mortgage default insurance = $18,600
This means that there would be $18,600 in mortgage default insurance on the purchase of a $500,000 home in Canada.
Mortgage insurance rates
These are the rates used to calculate mortgage insurance premiums based on the loan-to-value ratio.
| Loan-to-value Ratio | Premium on Total Loan Amount |
|---|---|
| Up to 65% | 0.60% |
| More than 65% up to 75% | 1.70% |
| More than 75% up to 80% | 2.40% |
| More than 80% up to 85% | 2.80% |
| More than 85% up to 90% | 3.10% |
| More than 90% up to 95% | 4.00% |
If there is a non-traditional down payment for a loan to value ratio more than 90% up to 95% then the premium is 4.50%.
How is mortgage default insurance paid?
The most common method for paying mortgage default insurance in Canada is to add the premium to the mortgage loan. This will pay off the mortgage insurance over the life of the mortgage when monthly payments are made.
You are also able to pay the cost of mortgage insurance upfront. In provinces such as Ontario, Quebec and Saskatchewan there is PST that is charged on the premium. This can not be added to the mortgage and must be paid at closing.
Is it a good idea to get mortgage default insurance?
There are some benefits to mortgage default insurance. The first being that it enables homeownership with a smaller down payment. This is particularity helpful for first-time homebuyers. Since the mortgage is insured it can lead to more competitive mortgage rates.