Mortgage Default Insurance (CMHC)

Mortgage default insurance, often referred to as CMHC insurance, is mandatory in Canada on property purchases where less than 20% of the purchase price was made as a down payment. Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage loan. This is because borrowers who make smaller (less than 20%) down payments are considered to be higher risk; with less equity paid up front in their home, they are more financially vulnerable, and more likely to stop making mortgage payments should they come under financial hardship.

Mortgage default insurance premiums are added to the mortgage’s principal amount and amortized over the length of the mortgage, meaning they’re paid off as part of the borrower’s monthly payment.

Also read: Insured vs. uninsured mortgages

Mortgage default insurance costs home buyers 2.8% to 4.0% of their mortgage amount. The only exception is for first-time buyers or those purchasing newly-constructed homes and opting for a 30-year amortization rather than 25; these borrowers must add an additional 20 basis points to their insurance premium. However, it does allow Canadians who might not otherwise be able to purchase homes access to the Canadian real estate market. Without it, overall mortgage rates would be higher, as the risk of default would broadly increase for lenders. Lenders are able to offer lower mortgage rates when mortgages are protected by mortgage default insurance because the risk of default is passed along to the mortgage insurer.

Qualifying for mortgage default insurance

There are some requirements you have to meet in order to qualify for mortgage default insurance:

• The maximum amortization period of 25 years, or 30 years if you're a first-time home buyer or purchasing a newly-constructed home.
• A purchase price between $500,000 - $1,499,999. Homes priced over $1.5 million cannot be insured.
• A down payment of less than 20%.
• The property must be owner occupied, with no more than two residential units.

To know more about the new down payment rules for insured mortgages, watch the video below.

There are several other requirements in order to be approved for CMHC coverage, specifically. These requirements changed on July 1st, 2020 in response to the economic downturn and became much more stringent. However, in response to a massive loss in market share, these updated rules were then reversed on July 5, 2021. Currently, the following applies: 

• Your minimum credit score must be 600 (down from the 680 stipulated in July 2020)
• You must have a Gross Debt Service ratio of less than 39% (up from 35% stipulated in July 2020)
• You must have a Total Debt Service ratio of less than 44% (up from 42% stipulated in July 2020)
• You must not borrow money for your down payment (this requirement is unchanged from July 2020)

It's important to note that private companies that also provide mortgage default insurance, such as Canada Guaranty, did not follow suit to make requirements more stringent, and, as a result, have become more popular with home buyers since CMHC updated its eligibility threshold (despite the CMHC having since reversed these stricter guidelines). 

Mortgage default insurance rates (CMHC insurance rates)¹

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:

*These mortgages have a down payment of greater than 20%. While you won't be paying the mortgage default insurance premiums in this case, coverage is still available to your lender, and they will often take out mortgage default insurance on your mortgage anyway.

**If you are a first-time buyer or purchasing new construction, and are opting for a 30-year amortization, you would add 20 basis points to the following. For example, if your loan to value is up to and including 95%, your premium would be 4.2%, rather than 4%.

These same rates are charged by all three providers: CMHC, Sagen and Canada Guaranty. Keep in mind that you'll also need to pay provincial sales tax (PST) 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 up front, in cash.

Mortgage default insurance calculation example: 

Let's say you just purchased a home for $300,000, made a $40,000 down payment, and have a 25-year amortization. Your mortgage default insurance premium would be calculated as follows: