Mortgage insurance, also known as mortgage default insurance, is a premium that's added to your total mortgage amount if you don't provide at least 20% for a down payment. This is required by the Canadian government and protects the mortgage lender if you default on your loan.
Though it does punish home buyers for not having a 20% down payment, it also makes it possible for first-time home buyers to buy a home with as little as 5% down. You may even qualify for cheaper mortgage rates since your loan is insured.
The Canada Mortgage and Housing Corporation (CMHC) is the largest mortgage default insurer in Canada, but you can also consider Sagen and Canada Guaranty. How much you have to pay and your minimum down payment varies by provider.
Key Takeaways
- Mortgage insurance is applied to your mortgage if you don't put at least 20% down for your down payment.
- The minimum down payment you must provide depends on the value of your home, but is typically 5%.
- The cost of mortgage insurance depends on how much of a down payment you put down, ranging from 0.6% to 4% of your mortgage.
- CMHC insurance is the most popular provider, but you can also consider Sagen and Canada Guaranty.
How to qualify for mortgage insurance
Mortgage insurance qualification requirements vary slightly based on which provider you use, but they do each have the following in common:
- The home must be in Canada and worth less than $1,000,000.
- Your amortization must be 25 years or less.
- Your down payment must come from your personal savings or as a gift from a family member (there may be alternative coverage if you need to borrow your down payment).
- Meet the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios (more on that below).
- For 1 or 2 unit homes, you must provide at least a 5% down payment (or more for houses worth over $500,000).
- For 3 - 4 unit homes, your down payment must be 10%. Homes with more than 4 units are subject to different rules.
The down payment that you need to provide for 1 or 2 unit homes changes if your home is worth more than $500,000. Here's how it works:
| Price of home | Minimum down payment required |
|---|---|
| $500,000 or less | 5% |
| $500,000 - $1,000,000 | * 5% on first $500,000 * 10% on rest |
| $1,000,000 or more | N/A |
To put the above amounts into perspective, here are some examples of the down payments required on homes of certain prices.
| Price of home | Minimum down payment required |
|---|---|
| $100,000 | $5,000 |
| $250,000 | $12,500 |
| $500,000 | $25,000 |
| $750,000 | $50,000 |
| $999,999 | $74,999.90 |
In addition to the above, Sagen also specifies that you need a credit score of 680.
All of this can be difficult to keep together, but luckily your mortgage lender will work with you to determine the amount of mortgage you qualify for. You can read up on the different qualification requirements and see other options here:
- CMHC general requirements
- Sagen Homebuyer 95 Program requirements
- Canada Guaranty Downpayment Advantage requirements
Understanding Gross Debt Service and Total Debt Service ratios
GDS and TDS ratios are set up to make sure you can afford the monthly costs and total debt you're taking on. Here's what they include:
- GDS: Your total monthly housing costs (including principal, interest, property taxes, and heating) compared to your gross household income.
- TDS: Your total debt, which includes your GDS plus any other debt, compared to your gross household income.
The qualifying ratio you're looking to hit varies slightly between providers:
| Provider | GDS | TDS |
|---|---|---|
| CMHC | 32% | 40% |
| Sagen | 39% | 44% |
| Canada Guaranty | 39% | 44% |
Mortgage insurance cost calculator
The amount you pay in mortgage insurance depends on your Loan-to-Value (LTV) ratio, which is how much you have to borrow for the home vs. how much you put down. So if you paid a 5% downpayment, your LTV ratio is 95%, since you took out a loan for the other 95% of the loan.
Here's how the premium is calculated based on your LTV:
| LTV ratio | CMHC premium | Sagen premium | Canada Guaranty premium |
|---|---|---|---|
| 90.01% - 95% | 4% | 4% | 4% |
| 85.01% - 90% | 3.1% | 3.1% | 3.1% |
| 80.01% - 85% | 2.8% | 2.8% | 2.8% |
| 75.01% - 80% | 1.4% | 2.4% | 2.4% |
| 65.01% - 75% | 1.7% | 1.7% | 1.7% |
| 65% or less | 0.6% | 0.6% | 0.6% |
To calculate how much your premium costs, simply use the following formula:
(Price of home - Down payment) * Premium = Cost
The total cost of your premium can either be paid as a lump sum or added to your mortgage.
Here are a few example scenarios with various down payment amounts on a $500,000 home:
| Down payment percentage | Down payment amount | Applicable premium based on LTV | Cost of insurance |
|---|---|---|---|
| 5% | $25,000 | 4% | $19,000 |
| 10% | $50,000 | 3.1% | $13,950 |
| 15% | $75,000 | 3.1% | $13,175 |
| 19% | $95,000 | 2.8% | $11,340 |
Do you have mortgage insurance?
Now that you're more familiar with mortgage insurance, hopefully you can see that you have way more choice than just coughing up a 20% down payment.
Have you had experience with obtaining mortgage default insurance? How did it go?
Give us your feedback and questions in the comments section below.
FAQ
Why do I need mortgage insurance?
If your down payment is less than 20% of the purchase price, you’re required by law to have mortgage default insurance. The advantage to you is that you can buy a home without having to save up a huge amount for the down payment.
What does mortgage insurance cover?
Mortgage insurance protects the lender if you default (stop making payments) on your loan and there’s not enough value in your home to cover the remaining mortgage amount. Please note mortgage insurance is not in place to protect you.
How much does mortgage insurance cost?
Mortgage insurance rates vary depending on your provider and down payment. For all 3 providers, the rates are between 0.6% and 4% of your mortgage amount. You may pay a premium if you port your mortgage to a higher-value home.
How do I pay for mortgage insurance?
Your mortgage lender will arrange mortgage insurance and pass the cost on to you. They’ll likely give you the option of paying the insurance premium upfront as a lump sum or adding it to your mortgage amount.
What is mortgage life insurance?
This is a type of mortgage insurance coverage that will pay off the remainder of your mortgage if you die. Canadians aren't required to purchase mortgage life insurance but it's a good thing to consider.
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