There are three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and Canada Guaranty.
Qualifying for mortgage default insurance
There are some requirements you have to meet in order to qualify for mortgage default insurance:
The maximum amortization for insured mortgages is 25 years.
If the purchase price is between $500,000 - $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.
Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% down payment is required on these homes.
There are several other requirements in order to be approved for CMHC coverage. These requirements changed on July 1st, 2020 in response to the economic downturn. To be eligible for CMHC insurance coverage after July 1st, borrows must:
Have a Gross Debt Service ratio of less than 35
Have a Total Debt Service ratio of less than 42
Have a credit score of at least 680
Must not borrow money for their down payment
Get a mortgage with as little as 5% down
Get today’s best rates on a CMHC-insured mortgage with as little as 5% down.
To determine which mortgage default insurance premium rate you have to pay, the first step is to calculate how much your down payment is as a percentage of your home’s purchase price. The chart below outlines the premium rates for each down payment scenario:
Premium on Total Loan
Premium on Increase to Loan Amount for Portability
*Up to and including 65%
*Up to and including 75%
*Up to and including 80%
Up to and including 85%
Up to and including 90%
Up to and including 95%
*These mortgages have a down payment of greater than 20%. While you won't be paying the CMHC insurance premiums in this case, coverage is still available to your lender, and they will often take out CMHC insurance on your mortgage anyway.
These same rates are charged by all three providers: CMHC, Genworth and Canada Guaranty. Keep in mind that you'll also need to pay provincial sales tax on your premiums if you live in Manitoba, Quebec, Ontario, and Saskatchewan. PST can't be added to your mortgage, so you'll need to pay upfront, in cash.
How do you calculate mortgage default insurance?
To understand how mortgage default insurance is calculated and paid for quickly, watch the video below. Scroll down further for more details on the calcultions.
Let's say you just purchased a home for $300,000 and made a $40,000 down payment. Your mortgage default insurance premium would be calculated as follows:
Step 1 :
Calculate your down payment as a % of your home price
$40,000 down payment÷$300,000 home value=
13.33%down payment %
Step 2 :
Calculate your mortgage amount
$300,000 home value$40,000 down payment=
$260,000 mnortgage amount
Step 3 :
Calculate your mortgage insurance premium
$260,000 mortgage amount
$8,060 insurance premium
How do you pay mortgage default insurance?
Mortgage default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax,
it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060; this is how much you would need to borrow from your lender, in order to purchase your home.
How to minimize mortgage default insurance
The only way to minimize your mortgage default insurance is by increasing your down payment as a percentage of your home price. To do this, you either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time homebuyer, a tax-free withdrawal from your RRSP, as part of the RRSP Home Buyers' Plan.
Note that under the changes to CMHC underwriting on July 1st, 2020, you will not qualify for CMHC coverage if you borrow money for a down payment. If borrowing your down payment puts you over the 20% down payment threshold, however, you won't need CMHC insurance at all.