For many first-time homebuyers, the most difficult part of buying a home is saving for a down payment and all of the associated closing costs. While many see mortgage default insurance – commonly referred to as CMHC insurance – as one of those added costs, the fact is that it not only helps you get a mortgage by protecting your lender, it also helps you get the same mortgage rates on a down payment as low as 5 per cent as someone who puts down 20 per cent or more.

What is mortgage default insurance?

Lenders require mortgage default insurance when homebuyers make a down payment of less than 20 per cent of the purchase price. It is not a fee paid at closing but a premium added to your mortgage loan and, therefore, is paid off monthly. The premium you pay protects your lender, should you default on your mortgage.

The one exception to this rule is when you are buying a home for more than $1 million. As of July 9, 2012, homes sold for more than $1 million do not qualify for mortgage default insurance and, therefore, require a down payment of at least 20 per cent.

Who offers mortgage default insurance?

Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and Canada Guaranty Mortgage Insurance all provide mortgage default insurance in Canada.

How is mortgage default insurance calculated?

You need to do two calculations, to calculate your mortgage default insurance premium.

First, you divide your down payment by the purchase price of your home to find out what percentage you are putting down. For example: $30,000 ÷ $300,000 = 10%. Below is a chart of CMHC’s premium rates, for you to see what rate and amortization options would be available to you. Using this example, you would have to pay a 2.00% premium with CMHC.

CMHC Premium Rates Chart

Second, you subtract your down payment from the purchase price of the home and multiply what’s leftover by the premium rate. Using our example, our total mortgage default insurance premium would be $5,400.

How can I pay less mortgage default insurance than what I’ve calculated?

The only way to pay less mortgage default insurance is to increase your down payment as a percentage of your home. Knowing this, you can either save more or put down what you have saved now on a home that is listed at a lower price. If you choose to save more, you can also exhaust all of your options (First-Time Home Buyers’ Plan, gift from family, etc.).

How do I pay for mortgage default insurance?

Mortgage default insurance is financed through your mortgage. Your mortgage loan is the purchase price – your deposit – remaining down payment + your mortgage default insurance premium. Once you know your mortgage rate, term, and amortization period, you can calculate and see that your monthly mortgage payment includes your insurance premium.