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Mortgage Default Insurance


Mortgage default insurance, commonly referred to as CMHC insurance, is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage default insurance protects lenders if a homeowner defaults on their mortgage. To understand how it is calculated and paid for, watch the video below.

Although mortgage default insurance costs homebuyers 1.75% - 2.75%1 of their mortgage amount, it is actually beneficial to the buyer market. Without it, mortgage rates would be higher, as the risk of default would increase. Lenders are able to offer lower mortgage rates when mortgages are protected by default insurance, as the risk of default is spread across multiple homebuyers.

On July 9th, 2012, the Canadian government made 2 key changes to CMHC insurance regulation:
1. CMHC insurance will not be available on homes >$1 million, requiring purchasers to put at least 20% down.
2. The maximum amortization period offered on CMHC-insured mortgages is 25 years.

1: Rates updated to reflect newest mortgage rule changes as of July 9th 2012.

Asking Price

Go
 STEP 1
Enter the price of the home you're interested in and press GO.
Down payment        Down payment The amount of money you pay up front to obtain a mortgage. The minimum down payment in Canada is 5%. For down payments of less than 20%, home buyers are required to purchase mortgage default insurance, commonly referred to as CMHC insurance.
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Amortization period        Amortization period The length of time it will take a homeowner to pay off his/her mortgage. In Canada, the maximum amortization period is 25 years. Longer amortization periods allow homeowners to make smaller monthly payments, but equate to more interest paid over the life of the mortgage.  
 
STEP 2
Choose an amortization period.
Mortgage insurance        Mortgage insurance Mortgage default insurance, commonly referred to as CMHC insurance, protects the lender in the case the borrower defaults on the mortgage. Mortgage default insurance is required on all mortgages with down payments of less than 20%, which are known as high ratio mortgages. Mortgage default insurance is calculated as a percentage applied to your mortgage amount. plus
Total Mortgage Required equals $- $- $- $-

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Who offers mortgage default insurance?

In Canada, mortgage default insurance is provided by CMHC (Canada Mortgage and Housing Corporation), Genworth Financial and Canada Guaranty Mortgage Insurance.

CMHC mortgage insurance logoGenworth mortgage default insuranceCanada Guaranty mortgage insurance

Mortgage default insurance rates (CMHC insurance rates)

The mortgage default insurance premium is calculated as a percentage of the total mortgage amount. The percentage applied varies based on the size of your down payment and the length of your amortization period as follows:

Amortization period Downpayment (% of home price)
5% - 9.99% 10% - 14.99% 15%-19.99% 20% or higher
31-35 years
N/A N/A N/A 0.00%
26-30 years
N/A N/A N/A 0.00%
25 years or less 2.75% 2.00% 1.75% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)

How do you calculate mortgage default insurance?

Let's say have just purchased a $300,000 home and have saved $40,000 for a down payment. You have decided to pay off your mortgage over the course of 25 years. Your insurance would be calculated as follows:

Step 1:
Calculate your down payment as a % of your home price
$40,000 / $300,000 = 13.33%
Step 2:
Factor in your amortization period

Amortization period is between 25 years or less

Step 3:
Find your insurance premium percentage in the chart
Insurance premium percentage is 2.00%
Step 4:
Calculate your mortgage amount
$300,000 - $40,000 = $260,000
Step 5:
Calculate your mortgage insurance premium
$260,000 * 2.00% = $5,200

How do you pay mortgage default insurance?

Mortgage default insurance is financed through your mortgage. Unlike closing costs such as lawyer fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Your insurance premium is added to the value of your mortgage, and your monthly payment increases accordingly. Continuing with the above example, the revised mortgage amount would be $260,000 + $5,200 = $265,200.

How to minimize CMHC insurance

There is one way to minimize mortgage default insurance:

1. Increase your down payment (as a percentage of your home price)

Increase your down payment (as a percentage of your home)

If you want to increase your down payment as a percentage of your home value, you will 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 loan from your RRSP.

Mortgage default insurance rates with a non-traditional down payment

For homebuyers using non-traditional sources for their down payment, their insurance premiums will increase if their down payments are between 5 and 9.99%, as shown in the chart below.

Amortization period Down payment (% of home price)
5% - 9.99% 10% - 14.99% 15%-19.99% 20% or higher
31-35 years
N/A N/A N/A 0.00%
26-30 years
N/A N/A N/A 0.00%
25 years or less 2.90% 2.00% 1.75% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)

Mortgage default insurance rates for self-employed, non-verified income

Self-employed individuals without 3rd-party income validation also face higher insurance premiums. The minimum down payment required to even obtain insurance is 10%, and premiums on down payments between 10%-19.99% are higher compared to standard applicants.

Amortization period Downpayment (% of home price)
5% - 9.99% 10% - 14.99% 15%-19.99% 20% or higher
31-35 years
N/A N/A N/A 0.00%
26-30 years
N/A N/A N/A 0.00%
25 years or less N/A 4.75% 2.90% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)