Mortgage insurance

Getting on the property ladder these days can seem like a distant dream for many Canadians. But with the help of mortgage insurance – and perhaps government incentives for first-time homebuyers – it’s possible to get on the housing market with a down payment as low as 5%.

Learn what mortgage insurance is, why you might need to pay it, how much it’ll cost you and more in our guide below.

What is mortgage loan insurance – and why is it charged?

Mortgage insurance, also commonly known as CMHC insurance or default insurance, is an additional charge that you’ll take on as a homebuyer if you provide a down payment of less than 20% of the purchase price of your property. While this insurance is in place to help Canadians get on the property market faster and with a lower down payment, mortgage insurance ultimately protects the lender in the case that a borrower stops making payments and defaults on their mortgage. Mortgage insurance also helps keep interest rates low, because the risk of defaulting on a mortgage is transferred to the lender when this insurance is involved.

You might wonder why you’d pay the extra charge of mortgage insurance when you can easily avoid it by providing a down payment of at least 20%, but there’s one simple reason: it helps homebuyers get on the market without saving up such a high down payment. If mortgage insurance didn’t exist, you’d be looking at paying $20,000 for every $100,000 you spend on a home.

When is mortgage insurance charged?

If you provide a down payment of less than 20% of the purchase price of your new home, you’ll be charged mortgage insurance. This is required by law, so if you’re looking to avoid the additional cost, you’ll need to put at least 20% down.

Mortgage insurance eligibility requirements

To be eligible for an insured mortgage, you’ll need to meet the following requirements:

• Keep your mortgage amortization period to 25 years or less.
• Ensure your home’s purchase price is less than $1 million.
• Meet the minimum down payment rules outlined below for any down payment less than 20%.

Cost

The cost of mortgage insurance will be anywhere from 2.80% to 4% of your mortgage amount. While the cost of your mortgage insurance mainly depends on the amount of down payment you provide, the type of mortgage you have can also affect the rate of interest.

As of September 2019, the rates charged by the three mortgage insurers – CMHC, Genworth and Canada Guaranty – are as follows:

How do I calculate how much mortgage insurance I’ll pay?

Here’s how to calculate how much you’ll pay for mortgage insurance:

1. Calculate your down payment as a percentage of your property’s purchase price.
2. Calculate your mortgage amount.
3. Calculate your insurance based on the down payment percentage your property falls into.

When is mortgage insurance a good idea – and when is it not?

How to get mortgage insurance

Although mortgage insurance is commonly referred to as CMHC insurance since the Canada Mortgage and Housing Corporation (CMHC) are a federal Crown corporation, there are actually two other private providers that offer mortgage insurance: Genworth Financial and Canada Guaranty.

The pros and cons of mortgage insurance

Bottom line

If you can’t afford a 20% down payment on your property and you’re ready to get on the housing market, you’ll have to pay mortgage insurance. While this insurance will add thousands of dollars onto the cost of your mortgage, it could be worth paying if you’re able to get on the housing market faster.

Think you’re ready to take the plunge and get on the property ladder? Learn more about mortgages in our guide here.

Frequently asked questions

• Is mortgage insurance the same as property insurance and mortgage life insurance?

  No, these are three different types of insurance.

  • Property insurance, also known as homeowners insurance, is the insurance you’ll need to protect your home against damage from disasters such as fire, floods, theft and more. This type of insurance is not required by law, however many lenders may require you to have it in order to be eligible for a mortgage.
  • Mortgage life insurance is designed to help you repay any outstanding mortgage debt should you pass away or face a long-term disability. This type of insurance is not required and is completely optional.

• How can I avoid paying mortgage insurance – or decrease the amount I'll pay?

  There are a couple of ways to avoid mortgage insurance altogether:

  • Provide a down payment of at least 20%.
  • Purchase a cheaper house where you can afford the 20% down payment.

  If you’re looking to minimize the amount of insurance you’ll pay, try to provide as close to a 20% down payment as you can. This will lower the amount of interest you face over the life of your mortgage.

• How can I fund my down payment?

  Aside from saving up for your down payment or asking family members to help you out, you can also withdraw up to $35,000 from your RRSP to pay all – or at least a portion – of your down payment. You will, however, need to pay this amount back within 15 years or else you’ll face tax repercussions.

• What are some first-time homebuyers incentives?

  Some incentives offered by the Government of Canada include:

  • Home Buyers Plan. You can now withdraw up to $35,000 from your RRSP and use it towards your down payment. You will, however, have to pay it back within 15 years of withdrawing.
  • First-Time Home Buyers (FTHB) tax credit. Claim up to $5,000 in tax credits on costs associated with purchasing your first home. Associated costs might include land transfer tax, legal fees or disbursements.
  • GST/HST New Housing Rebate. You can qualify for a rebate to recover part of your GST or HST payments that you paid on the purchase price, on the cost of renovating or adding additions, or on converting a non-residential property into a home.
  • First-Time Home Buyer Incentive. Eligible first-time homeowners who have a minimum down payment for an insured mortgage can apply to finance a small portion of their home through a shared equity mortgage with the Government of Canada.