Purchasing a home is one of the largest financial decisions Canadians will make. For many, coming up with a 20% down payment can be a major obstacle to homeownership. This is where mortgage default insurance comes into play. It allows homebuyers to purchase a home with a down payment as low as 5%, protecting the lender against the risk of default.
Whether you’re a first-time homebuyer curious about CMHC requirements or a savvy borrower looking to minimize premiums, this comprehensive provides an in-depth look at everything you need to know about mortgage default insurance in Canada to make an informed decision. Let’s get started!
What is Mortgage Default Insurance in Canada?
Mortgage default insurance protects the lender if the borrower defaults on a mortgage loan. It is required by law for mortgages with less than 20% down payment in Canada.
Without it, lenders would view these high-ratio mortgages as too risky. Mortgage default insurance reduces the lender’s risk, allowing them to lend and offer preferred rates to insured borrowers confidently.
If a borrower defaults, the mortgage insurer compensates the lender for its losses. The lender can recover the outstanding loan balance by selling the property. However, the borrower is still responsible for repaying the mortgage debt.
Who Offers Mortgage Default Insurance in Canada?
Canada has three major mortgage insurance providers – CMHC, Sagen, and Canada Guaranty.
Canada Mortgage and Housing Corporation (CMHC)
The Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency and a Crown corporation wholly owned by the federal government. Established in 1946, it has offered mortgage default insurance products to promote affordable homeownership.
Sagen
Sagen is Canada’s largest private mortgage insurance provider, formerly known as Genworth Canada. It has been in business for over 40 years, providing lenders with mortgage default insurance, consumer lending services, and application software solutions.
Canada Guaranty Mortgage Insurance Company
Canada Guaranty, operated in Canada since 2010, provides default insurance on residential mortgages and rental, commercial, and agricultural loans. Canada Guaranty aims to provide flexibility, offer niche products, and simplify the underwriting process.
What Does Mortgage Default Insurance Cover?
Mortgage default insurance protects the lender, not the borrower. Here’s what it covers if a borrower defaults:
- Insurance pays lenders for losses if the home sale does not fully cover the outstanding loan balance.
- Typically covers principal balance, accrued interest, legal fees and other costs from a sale or foreclosure.
- The insured principal amount cannot exceed the loan origination value based on property appraisal.
- Covers lenders up to the maximum policy limits under the insured mortgage terms.
- The borrower remains legally responsible for any mortgage shortfall after the insurance payout.
- It does not cover borrowers who cannot make payments due to job loss, disability, etc. – they need separate mortgage protection insurance.
While protecting the lender, mortgage default insurance does not free the borrower from the underlying responsibility of repaying their mortgage debt.
Benefits of Mortgage Default Insurance
There are several key benefits mortgage default insurance provides in Canada’s housing market:
- Increased home affordability: It allows down payments as low as 5%, opening homeownership to more Canadians. This is especially helpful for first-time homebuyers struggling to come up with a large down payment.
- Access to preferred mortgage rates: Insured mortgages often have lower interest rates than those with 20% or more down payment. This can result in substantial savings over the life of the mortgage loan.
- Protection for lenders: With the risk of default transferred to the insurer, lenders are more comfortable providing mortgages to borrowers with less equity invested upfront.
- Stable housing market – This reduces systemic risk and promotes responsible lending across the mortgage industry, contributing to the stability of Canada’s real estate sector.
While beneficial for many, this insurance comes at an added cost, which should be factored into the home-buying budget.
Cons of Getting Mortgage Default Insurance
While beneficial in many ways, mortgage default insurance also has some downsides to consider:
- Added costs – The insurance premiums add significant one-time fees to your home-buying expenses.
- Loan restrictions – Insured mortgages limit prepayment flexibility and amortization length.
- Stress testing – Insured mortgages require mortgage stress tests at a higher qualifying rate, making approval harder.
- Inflexible terms – Insured mortgages have more rigid loan conditions that cannot be customized.
- Credit impact – A default on an insured mortgage can severely hurt your credit score and borrowing ability.
Before taking on an insured high-ratio mortgage, carefully weigh the pros and cons to ensure it is appropriate for your financial situation.
CMHC Mortgage Insurance
CMHC Mortgage Insurance is the most used and recognizable, widely available from banks, credit unions, and other National Housing Act-approved lenders nationwide.
CMHC insurance compensates lenders for losses if a borrower defaults and the property sale does not fully cover the outstanding loan balance. This allows lenders to offer mortgages with higher loan-to-value ratios.
Almost all major banks and mainstream lenders actively promote CMHC insurance to borrowers requiring mortgage default coverage. It also offers programs and tools to assist potential first-time home buyers.
How Much Does CMHC Insurance Cost?
CMHC mortgage insurance comes at a cost and is passed on to the borrower. The insurance premium is calculated as a percentage of the total loan amount and will depend on the size of your down payment.
Here are the CMHC mortgage insurance premiums for 2024:
| Loan-to-Value Ratio | Premium |
| Up to and including 65% | 0.60% |
| Up to and including 75% | 1.70% |
| Up to and including 80% | 2.40% |
| Up to and including 85% | 2.80% |
| Up to and including 90% | 3.10% |
| Up to and including 95% | 4.00% |
For example, you purchase a $400,000 home with a 5% down payment of $20,000, so you must borrow $380,000.
With less than 20% down, you’ll be required to get CMHC mortgage default insurance. The 5% down payment premium rate is 4% of the mortgage amount.
4% of your $380,000 mortgage is $15,200. This $15,200 CMHC insurance premium will be added to your total borrowing costs.
The CMHC premium is a one-time fee added to your total mortgage amount. Unlike home insurance, it does not require an annual renewal. Sales tax is payable on CMHC premiums in Ontario, Quebec, Manitoba, and Saskatchewan.
CMHC Mortgage Insurance Eligibility Requirements
To qualify for CMHC mortgage loan insurance, you must meet the following key eligibility criteria:
- Purchase Price – The property purchase price must be below $1 million to be eligible.
- Minimum Down Payment – A 5% down payment is required based on the purchase price or appraised value.
- Debt Service Ratios – Your Gross Debt Service and Total Debt Service Ratios (GDS & TDS) must be under 39% and 44%, respectively. This ensures you have sufficient income for mortgage payments and other credit obligations.
- Credit Score – A minimum credit score of 600 is required for approval.
- Stable Income – You must have sufficient income to support mortgage payments and other debt obligations.
- Owner-Occupied – Non-rental properties with up to 2 units (duplex) qualify for CMHC owner-occupied insurance.
- Amortization – Mortgages must have a maximum 25-year amortization period.
Meeting these criteria is necessary but does not guarantee insurance approval. CMHC will also assess your application details, including income sources, assets, liabilities, property valuation and other factors.
Steps to Get CMHC Mortgage Insurance
When you apply for a high-ratio mortgage, CMHC mortgage insurance must be obtained through an approved lender. Your lender will submit your application details to CMHC and, if approved, obtain a Certificate of Insurance.
Here are the steps to getting CMHC mortgage loan insurance:
- Get pre-approved – Talk to your lender to get a pre-approval for a CMHC-insured mortgage based on your down payment, income, credit, and property.
- Apply – Your lender will submit your application and documentation to CMHC for approval and issue a Certificate of Insurance.
- CMHC underwriting – CMHC will evaluate your application against its insurance criteria, which include credit score, debt ratios, stable income, and down payment sources.
- Receive Certificate – If approved, CMHC will provide a Certificate of Insurance to your lender permitting the high-ratio mortgage.
- Closing costs – Your lender will collect the CMHC insurance premium and applicable sales tax as part of your closing costs.
Your CMHC Certificate of Insurance will remain on file and transferable between lenders when you renew your mortgage.
Pay for your CMHC Insurance Premiums
You have options when it comes to paying for your CMHC mortgage insurance premium:
Upfront lump sum – Pay the full premium in cash for your closing costs. This avoids paying interest but requires having the funds readily available.
Add to mortgage – Your lender can add the CMHC premium to your total mortgage amount, letting you pay it off over time. However, you will pay interest on the premium over the mortgage’s term.
Split payment – You can pay part of the premium upfront and add the remaining balance to your mortgage. This lets you minimize interest costs while conserving funds for closing.
When determining the best payment method, compare the interest savings from paying upfront versus the costs of financing the premium over 25+ years. Adding the premium to your mortgage may make sense if cash flow is limited.
How to Minimize Insurance Costs?
While CMHC mortgage insurance can be expensive, there are ways savvy homebuyers can reduce costs:
- Optimize your down payment – Increasing your down payment to just above the 5%, 10%, or 15% thresholds can significantly lower your premium percentage.
- Pay the premium upfront – Avoid added interest by paying the lump sum CMHC insurance in cash instead of adding it to the mortgage.
- Consider portable amortization – Mix and match amortization periods when renewing to maintain CMHC coverage but minimize premiums.
- Leverage CMHC Green Home – Get a premium refund of up to 15 – 25% if you buy, build, or renovate an energy-efficient property.
- Utilize CMHC portability – If you purchase a new home within certain timeframes, CMHC offers premium credits of up to 100% based on your previous insured mortgage details.
With the right strategies, you can reduce the costs of CMHC mortgage loan insurance and make homeownership more affordable.
CMHC Insurance vs. Private Mortgage Insurance (PMI)
While CMHC is the most recognized name in Canada’s mortgage insurance industry, companies like Sagen and Canada Guaranty offer private mortgage insurance as an alternative to CMHC insurance. It provides the same protection to lenders for high-ratio mortgages with less than 20% down payment.
Here’s how CMHC insurance compares to private insurance:
- Premium rates – Private insurers offer comparable premiums to CMHC within the same ranges based on a down payment.
- Underwriting criteria – Private insurers sometimes offer more flexible debt ratios or minimum credit scores.
- Availability – CMHC is more widely available nationwide from major lenders who actively promote it.
- Brand reputation – CMHC is a familiar government-backed option, while private insurers have less public awareness.
- Market share – CMHC currently holds over 50% of the mortgage insurance market, though private insurers have gained ground.
- Programs – CMHC provides unique programs and tools for first-time and lower-income home buyers that the private market lacks.
While CMHC historically has dominated the mortgage insurance space, private providers continue to offer competitive alternatives for consumers.
Making a Claim on Your CMHC Mortgage Insurance
In the unfortunate event that a borrower defaults on their CMHC-insured mortgage, the lender can claim to recover losses. Here is the typical process:
- Mortgage defaults – If the lender cannot establish an alternative repayment plan after 3+ missed payments, it may declare the mortgage in default.
- Property sale – The lender obtains legal permission to sell the property through a power of sale or judicial sale under the mortgage terms.
- CMHC claim – After selling the home, the lender submits a claim to CMHC for the outstanding mortgage balance and legal costs.
- CMHC compensation – CMHC sends compensation to the lender up to the maximum insured loan limits and mortgage terms.
- Borrower responsibility – Any shortfall between sale proceeds and the insured mortgage amount remains owed by the borrower.
- Credit impact – The borrower’s credit report will show a default, making it harder to qualify for future loans.
While CMHC protects the lender, the original borrower is still legally responsible for debt not recovered by the insurer. Defaulting has severe credit consequences.
CMHC Insurance Programs and Products
Beyond its core mortgage default insurance offering, CMHC provides a suite of programs targeted to assist different types of borrowers:
- Self-Employed – Special considerations for borrowers with non-traditional income sources.
- Newcomers – Alternative qualification using international credit history for new Canadians.
- Improvement – Finance home repairs, renovations or energy retrofits.
- Purchase – Insurance for first-time home buyers.
- Multi-Unit – Insurance for residential and commercial properties with multiple rental units.
- Green Home – Insurance incentives for energy-efficient housing.
- Portability – Insurance premium discounts are available when transferring between properties.
Understanding these CMHC programs can help you optimize your mortgage application. Consult an expert mortgage broker to identify which options suit your situation.
Insured vs. Uninsured Mortgages in Canada
Beyond the down payment requirement, there are other key differences between CMHC-insured mortgages and conventional uninsured mortgages:
| Feature | Insured Mortgage | Uninsured Mortgage |
|---|---|---|
| Interest Rates | Often lower | Typically higher |
| Premium Costs | Require added CMHC premium | No insurance premium |
| Payment Frequency | Allow accelerated bi-weekly | Monthly or bi-weekly |
| Prepayment Options | More restrictive | More flexible |
| Max. Amortization | 25 years | Up to 30 years |
| Debt Ratio Limits | GDS 39%, TDS 44% | Higher GDS/TDS permitted |
| Portability | Transferable between lenders | Not portable |
While there are merits to both insured and uninsured mortgages, understand how each aligns with your financial situation and goals.
Alternatives to CMHC Insurance
For home buyers who do not fit CMHC’s criteria, there are several options besides conventional high-ratio mortgage insurance:
- 20% down payment – Bypass insurance requirements altogether by saving a 20%+ down payment for an uninsured mortgage.
- Alternative lenders – Credit unions and private lenders can arrange insured mortgages through Sagen or Canada Guaranty.
- B lenders – Specialized lenders provide alternative mortgages tailored to those who cannot obtain traditional financing.
- Loan programs – Explore bank loan programs such as the National Housing Act or Affordable Housing Program.
- Private financing – Connect with private mortgage brokerages, investors or hedge funds willing to lend on a deal-by-deal basis.
- Co-sign or guarantee – Ask a family member to co-sign or guarantee the mortgage to supplement your qualifications.
- Sell first, then buy – Sell your current property so you have a larger down payment for your new mortgage.
Consider these options if CMHC does not approve the property purchase insurance.
Conclusion
Mortgage default insurance opens doors to homeownership by allowing smaller down payments, the advantage of lower interest rates and increasing borrowing power. But it also comes at a cost.
Educate yourself on the insurance options available, associated costs, lender offerings, payment methods and qualification criteria. These insights will empower you to make a wise and informed decision when purchasing your home.
Ready to start the home-buying process? The mortgage experts at Best Mortgage Online can help.
Contact Best Mortgage Online and leverage our team’s expertise to make financing easy, affordable and stress-free. Your dream home is within reach!
FAQs
How does mortgage default insurance work in Canada?
Mortgage default insurance protects lenders if a high-ratio mortgage borrower misses payments. The insurer covers losses so the lender can recover the loan balance by selling the property.
What is the difference between CMHC and private mortgage insurance?
CMHC is a government-backed insurer, while Sagen and Canada Guaranty are private companies. They offer similar premium rates, but CMHC is more widely available.
Where can I get CMHC mortgage insurance?
CMHC insurance is available from banks, credit unions, and other lenders approved under the National Housing Act across Canada.
Why is mortgage default insurance mandatory for under 20% down?
Requiring insurance for high loan-to-value mortgages helps lenders manage risk. It makes home buying accessible for those without large down payments.
When should I pay my CMHC premium - upfront or financed?
Paying the lump sum premium upfront prevents interest costs but requires having the cash. Financing spreads the cost over your mortgage.
Do I qualify for CMHC mortgage insurance with bad credit?
CMHC requires a minimum credit score of 600. With poorer credit, you may need a larger down payment or co-signer to qualify.
Is mortgage default insurance mandatory for used homes?
Yes, insured mortgages are required for any home purchase with less than 20% down, whether a new or resale property.
How much is CMHC insurance on a $750,000 mortgage?
With 10% down, a $750,000 home would require CMHC insurance of 3.1% of the $675k mortgage = $20,925.
Can I cancel CMHC insurance if my home value increases?
No, CMHC premiums are a one-time fee, and the insurance cannot be cancelled even if you gain equity from appreciation.
What lenders offer CMHC mortgage default insurance?
All major banks and many credit unions can offer CMHC insurance as National Housing Act-approved lenders; private lenders cannot.
Article Sources
At Best Mortgage Online, we cite statistics from trusted governmental and industry organizations to guarantee accuracy.