Definition:
Mortgage default insurance is a type of insurance that protects lenders in case a borrower defaults on their mortgage. In Canada, it is typically required for homebuyers who have less than a 20% down payment. The insurance ensures that the lender is compensated for any losses if the borrower is unable to repay the loan.

Why mortgage default insurance is necessary

This insurance is particularly important for high-ratio mortgages—loans where the borrower’s down payment is less than 20% of the home’s purchase price. Without this insurance, lenders would be at greater risk if the borrower defaults. By having mortgage default insurance, lenders are more willing to offer loans to individuals with smaller down payments, which helps more people enter the housing market.

How mortgage default insurance works

When you take out mortgage default insurance, the premium is usually added to your mortgage loan amount. This means you’re paying it off over time, not as an upfront cost. The premium amount depends on the size of your down payment and the size of your mortgage. Generally, the smaller the down payment, the higher the premium. If you default on your mortgage, the insurer will cover the cost of the lender’s losses up to a certain limit.

Who provides mortgage default insurance

In Canada, mortgage default insurance is typically offered by three main providers:

• Canada Mortgage and Housing Corporation (CMHC)
• Sagen
• Canada Guaranty
  These companies provide the insurance, but the terms and premiums may vary. It’s a good idea to shop around to see which option is best for your situation.

Costs of mortgage default insurance

The cost of mortgage default insurance is generally calculated as a percentage of your mortgage loan. The premium can range from 0.6% to 4.5%, depending on the size of your down payment. The insurance premium is added to your loan balance, so you’ll pay it off over the term of the mortgage. While this adds to your monthly payments, it allows you to purchase a home with a smaller down payment.

How to avoid mortgage default insurance

If you have a down payment of 20% or more, you won’t need mortgage default insurance. Many buyers choose to save for a larger down payment to avoid the added cost of insurance. However, for those who may not have the means to save a large amount upfront, mortgage default insurance is a useful option that allows them to purchase a home with a smaller down payment.

The impact of mortgage default insurance on homebuyers

While mortgage default insurance adds to your costs, it can help you buy a home sooner rather than waiting years to save for a 20% down payment. It makes homeownership more accessible for those with limited funds for a down payment, providing the opportunity to enter the housing market with a smaller initial investment.

Getting help with mortgage default insurance

If you’re considering purchasing a home with a smaller down payment, it’s important to speak with a mortgage broker or lender who can help you understand your options. They can help you calculate the costs of mortgage default insurance and determine if it’s the right choice for you.

Last modified: November 11, 2024