If you’re financing a home with less than 20 percent down, then you’re typically considered to have a high-ratio loan and will need to pay for mortgage loan insurance (also called mortgage default insurance). In some cases—for instance, if you’re a Canadian resident with citizenship elsewhere—your lender may require this insurance even with a down payment of 20 percent or more because of a higher potential for default.
The purpose of mortgage default insurance is to protect your lender in the event that you default on your mortgage payments. If you stop making payments, the mortgage default insurer would protect your lender from financial losses. This is not to be confused with mortgage life insurance (which repays any outstanding mortgage debt in the event that a homeowner dies or becomes disabled) or homeowners’ insurance (which insures the home and its content against damages from fire, theft or other disasters). Mortgage loan insurance primarily protects the lender, but it also helps the buyer by keeping default risk (and thus interest rates) low.
Canada Mortgage and Housing Corporation (CMHC) is the nation’s biggest player in mortgage insurance, although Canada Guaranty and Genworth offer similar insurance products. The cost of your mortgage insurance premiums varies depending on the type of mortgage you’re applying for and the size of your down payment. Starting July 31, CMHC will stop insuring homes worth over $1 million even if the borrower puts down more than 20 percent of the purchase price.
Generally, the cost of insurance ranges between 1 and 4 percent of the purchase price. For instance, according to CMHC’s website, with a 10 percent down payment (meaning you borrowed 90 percent of the home’s purchase price), the premium of your total loan would be 2.40 percent. Canada Guaranty increased its premiums effective May 1, so that with 10 percent down, the single premium is now 2.4 percent or 4.9 for a top-up premium (a top-up premium might apply if you wanted to port a high-ratio mortgage).
Different insurance rates apply for financing an energy-efficient home, a rental property or a vacation home. Self-employed buyers who can’t document your income may qualify for a different insurance product such as Canada Guaranty’s Low Doc Advantage.
You can either pay for mortgage loan insurance in one lump sum at closing or spread it over the length of the mortgage. The longest amortization period for an insured mortgage is 25 years.