Understanding Mortgage Default Insurance

Mortgage default insurance is required by the Government of Canada when home buyers are putting less than the 20% down payment typically needed to qualify for a conventional mortgage. This type of insurance compensates mortgage lenders for losses caused by a mortgage default. The most common reason for defaulting is not making your mortgage payments.

To be eligible for mortgage default insurance, you will first have to meet your bank’s lending qualifications as well as the underwriting standards of your mortgage insurer. The insurance is offered by a number of mortgage insurers, including Canada Mortgage and Housing Corporation (CMHC).

While this insurance is primarily protecting your lender from losing money if you default, it can also benefit you by allowing you to buy a home sooner with a down payment as low as 5%, assuming you meet all other criteria set by your lender for the mortgage.^*

Other things to know about mortgage default insurance:

• It provides protection to the mortgage lending institution only; it does not protect you or your interest in the property.
• It does not cover your mortgage payment if you’re unable to pay it or if you pass away.
• It’s only available for residential homes priced under $1,500,000.
• Your premium is calculated as a percentage of the amount borrowed.
• Typically, the bigger your down payment, the lower your premium will be. Amortization period, property value, type of occupancy, and owner’s employment also factor into the premium’s calculation.
• Your premium can typically be added to the total balance of the mortgage and paid monthly over the amortization term (maximum of 30 years, subject to eligibility^**) so you don’t have to pay it all at once – in which case interest will apply to the premium.

Speak to a mortgage specialist to learn more about mortgage default insurance.

^* The minimum down payment requirement for mortgage default insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage default insurance is available only for properties with a purchase price or appraised value below $1,500,000.

^** A maximum amortization period of 30 years will apply to: (i) all first-time home buyers provided they satisfy the definition of a first-time homebuyer, or (ii) eligible purchasers of newly built homes. Additionally, to be eligible for a 30-year amortization, the down payment must be below 20%. All other default insured programs are limited to 25 years.