Many Canadians are surprised to learn that if they put less than 20% down on a home, mortgage default insurance is mandatory. This insurance protects lenders if borrowers cannot make their payments, but it also opens the door for homebuyers to qualify for a mortgage with a smaller down payment.
In this guide, we’ll break down what mortgage default insurance is, who needs it, how much it costs, its pros and cons, and smart strategies to avoid paying it when possible.
What Is Mortgage Default Insurance?
It is a type of insurance that protects lenders if a borrower defaults on their mortgage. While it primarily protects the lender, it also benefits homebuyers by allowing them to purchase a home with less than 20% down. Without it, many Canadians would need a much larger down payment to secure a mortgage.
Who Needs Mortgage Default Insurance in Canada?
Mortgage default insurance is needed for homebuyers who make a down payment of less than 20% of the property’s purchase price. This includes most first-time buyers or those looking to keep more cash on hand for other expenses.
However, there are some exemptions. Homes valued over $1 million do not require mortgage default insurance, and certain mortgage structures or amortization periods may also qualify for exceptions.
By requiring this insurance, lenders can safely offer mortgages to buyers with smaller down payments, making homeownership more accessible to many Canadians who might otherwise struggle to save for a large down payment.
How Much Does Mortgage Default Insurance Cost?
Your loan-to-value ratio, which is the amount you borrow relative to the home’s purchase price, determines the cost of this default insurance. Your premium rises with your ratio, which means it increases as your down payment decreases.
Typical CMHC premium rates are as follows:
| Down Payment | Loan-to-Value Ratio | Premium Rate |
| 5% | 95% | 4.00% |
| 10% | 90% | 3.10% |
| 15% | 85% | 2.80% |
For example, if you purchase a $500,000 house with a 5% down payment:
- Mortgage: $475,000
- Premium = 4.00% × $475,000 = $19,000
Rather than paying this amount upfront, the $19,000 premium can be added to your mortgage, slightly increasing your monthly payments.
Lenders usually offer this insurance through one of three major providers: CMHC, Sagen (formerly Genworth), and Canada Guaranty.
Pros and Cons of Mortgage Default Insurance
Before you make any decision, consider the pros and cons of this type of insurance.
Pros
- Makes homeownership with little down payments possible, buyers may enter the market earlier without saving a whole 20%.
- Stabilizes the housing market: protects lenders from risk and guarantees mortgage availability even in economic slumps.
- Accessible all across Canada; offered by major lenders and insurance companies in every province.
Cons
- Increases the price of your mortgage. Over time, premiums add up to the overall amount you will have to pay back.
- Only guards the lender. It offers the homeowner no direct advantages or protection.
- Under 20% down, cannot be avoided: It is necessary unless you make a 20% down payment.
How to Prevent Mortgage Default Insurance
Although the program benefits many Canadians, it’s still an extra cost. Here are your primary choices if you would rather not pay for this type of insurance:
- Save at least twenty percent.
- If your down payment is 20% or more, you won’t need the insurance; that is the most direct way.
- Get a cheaper home.
- Lowering your purchase price quickens your attainment of the 20% limit.
- Think about co-buying with friends or family.
- Pooling of assets might boost your purchasing power and down payment.
- Apply savings under the Home Buyers’ Plan (HBP)
- To pay for a down payment without incurring tax penalties, Canadians may withdraw up to $35,000 (per person) from their RRSP.
Wrap Up
Mortgage default insurance is a key part of the Canadian housing market, allowing many buyers to enter homeownership with less than 20% down. While it comes with added costs and primarily protects lenders, understanding how it works and the strategies to minimize or avoid it can save you money and help you make smarter mortgage decisions.
At Diverse Mortgage Group, our team of mortgage brokers can guide you through every step of the mortgage process, helping you understand your options, calculate costs, and explore ways to maximize your down payment.
Contact us today to see how we can help you get the right mortgage for your needs.
FAQs
1. What exactly is mortgage default insurance in Canada?
This type of insurance protects the lender if the borrower stops making mortgage payments. It is always the case for down payments that are less than 20%.
2. Who is obliged to get mortgage default insurance in Canada?
It is a must for people buying a home with a down payment of less than 20%. There are some cases where it does not apply, such as for properties worth over one million dollars or for specific amortization periods.
3. Is it possible for me to avoid paying mortgage default insurance?
Yes. If you can make a down payment of 20% or more, choose a less expensive property, or co-buy with someone to increase your combined down payment, you won’t need mortgage default insurance.
4. What is the cost of mortgage default insurance?
Cost is dependent on your loan-to-value ratio, and it generally ranges from 2.8% to 4.0% of the total mortgage amount.
5. Is the homeowner protected by mortgage default insurance?
Not at all, only the lender is protected. The borrower pays for it but does not receive any direct protection.
