Why Bother With Mortgage Default Insurance?
Image courtesy of Twin Mortgages
If you’re buying a home in Canada and planning to put down less than 20%, chances are you’ll encounter mortgage default insurance (often called CMHC insurance). Understanding what it is and how it affects your mortgage is important—not just for meeting lender requirements but for managing the overall cost of your home purchase.
What Is Mortgage Default Insurance?
Mortgage default insurance is an insurance policy that protects the lender—not you—if you stop making mortgage payments. Because buyers who put down less than 20% of the home’s price are considered higher risk, lenders require this insurance to reduce their risk exposure. The good news is, mortgage default insurance enables you to qualify for a mortgage with as little as 5% down, opening up homeownership to many Canadians who might not otherwise be able to buy.
Who Needs Mortgage Default Insurance?
You’re required to purchase mortgage default insurance if:
Your down payment is less than 20% of your home’s purchase price, and
Your home purchase is $1.5 million or less (for homes over $1.5 million, a minimum of 20% down is required, and mortgage default insurance is not available).
If your down payment is 20% or more, you don’t have to pay for mortgage default insurance, but lenders might still purchase it for their protection in some cases.
How Much Does It Cost?
The cost, or premium, is calculated as a percentage of your mortgage amount and depends on your loan-to-value (LTV) ratio—the amount you’re borrowing relative to the property price. The smaller your down payment, the higher the premium you pay. This premium can be paid upfront or added to your mortgage balance.
Here’s a quick look at typical premium rates:
5% down payment (95% LTV): 4.00% of your mortgage amount
10% down payment (90% LTV): 3.10%
15% down payment (85% LTV): 2.80%
For example, if your home costs $500,000 and you put 5% down ($25,000), your mortgage is $475,000. At a 4% insurance premium, approximately $19,000 is added to your mortgage, making your total mortgage $494,000.
Why Does It Matter to You?
Mortgage default insurance has pros and cons. It allows many buyers to enter the real estate market sooner with a smaller down payment and access to more competitive interest rates. However, it adds to your mortgage balance and increases your overall cost.
Let’s say you’re Sarah, buying her first home with only 10% down. By using mortgage default insurance, Sarah could afford the home earlier while balancing monthly payments, but her mortgage is slightly higher due to the insurance premium. Being aware of these costs helps Sarah plan her budget and understand the true cost of buying her home.
If you’re considering buying a home with less than 20% down or want to understand how mortgage default insurance fits into your financial plan, I’m here to help. Contact me, Mr. Mortgage (Kechanth Kannan), for expert guidance tailored to your unique situation.
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