Mortgage Default Insurance
What is Mortgage Default Insurance?
All unconventional (less than 20% down payment) mortgages must be insured.
Mortgage default insurance protects the lender in the event that you stop paying your mortgage. Lenders pay for this insurance and the cost is passed on to the borrower.
The point of the insurance is to protect the lender. If someone defaults on their mortgage the lender needs to be able to recoup their loss.
When the mortgage amount is less than 80% of the value it's easy for lenders to recoup their losses by selling the property. However, when the property is financed to more than 80%, it can be harder to recoup losses, especially if economic changes have caused the home price to lower (similar to the USA mortgage crisis in 2008). Mortgage default insurance covers lenders for this risk.
Mortgage default insurance is not needed when the mortgage is conventional (20% or more down payment) in the majority of cases.
Although the insurance is designed to benefit the lender, consumers also benefit from lower rates available for insured mortgages.
Mortgage Default Insurance Providers
There are three mortgage default insurance providers in Canada:
- Canada Guaranty
How Much Does It Cost?
The Mortgage Default insurance cost is based on a percentage of the mortgage amount and how much you use for your down payment. The higher the Loan-to-Value (LTV) the higher the premium percentage.
Here is a look at the Insurance premium table for CMHC mortgage default insurance:
|Premium on Total Loan||Premium on Increase to Loan Amount for Portability
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||1.70%||5.90%|
|Up to and including 80%||2.40%||6.05%|
|Up to and including 85%||2.80%||6.20%|
|Up to and including 90%||3.10%||6.25%|
|Up to and including 95%||4.00%||6.30%|
|90.01% to 95% —
Non-Traditional Down Payment**
Although this table shows insurance premium up to 65% loan to value, most lenders do not charge insurance premium when the loan to value is 80% or lower.
The Insurance premium amount is added onto the mortgage and therefore is also amortized over the life of your mortgage. In Ontario, 8% provincial sales tax must be paid, and cannot be added to the mortgage. This PST amount is one of your closing costs when purchasing and the mortgage is insured.