Default insurance (CMHC insurance)
Default insurance is expensive but useful (and often required!)
TL;DR: you need this if you have less than a 20% down payment. You probably don't need this if you have 20% or more of a down payment. It is added to your mortgage; there's no cash cost. It protects the lender if a borrower skips out on paying. Default insurance is what allowed mortgages with low down payments at low rates to even exist.
When it comes to getting a mortgage, if your down payment is under 20% you will need mortgage default insurance. In some cases, even if your down payment is 20%, you may still need to get this insurance in place at your expense. This offers protection for lenders in the case that a borrower can’t make their mortgage payments and defaults on their loan.
Mortgage default insurance, if it is required, generally costs between 2.80% and 4% of the mortgage total. However, it is an important part of allowing home buyers the opportunity to buy property. If mortgage default insurance did not exist rates for mortgages would be much higher, as the risk to lenders would also increase. This added protection for lenders gives them confidence to offer lower rates for mortgages.
Default Insurance Property Criteria
In order to qualify for mortgage default insurance there are some criteria you will need to meet:
The property can't be a single-unit rental property
Mortgage insurance is only available on owner-occupied properties, or rental properties that are 2 to 4 units.
Your mortgage amortization can’t be more than 25 years
In 2012, the government eliminated 30 year amortizations on default-insured mortgages. The maximum amortization is now 25 years, otherwise the mortgage is considered uninsurable.
The price of the house must be less than $1,000,000
Homes valued at $1,000,000 do not qualify for mortgage default insurance. This means that buyers who want to purchase property in this price range will need 20 percent for a down payment.
Where to get mortgage default insurance
There are three companies in Canada who offer default insurance. Those are Genworth Financial and Canada Guaranty, as well as the CMHC.
Rates for mortgage default insurance
To work out how much you will have to pay for mortgage default insurance you will need to know what percentage of a down payment you are making. As of March 17, 2017, down payments of under 10 percent will need to pay 4 percent premium rate; down payments worth 10% 14.99% of the home price will qualify for a 3.10% premium rate; down payments that fall between 15% and 19.99% will need a 2.80% premium rate.
Calculating mortgage default insurance
Here is an example to help home buyers better understand how mortgage default insurance premiums are calculated.
First, determine what percentage down payment you are making. If you are paying $15,000 down on a $300,000 property, this is a 5% down payment. The default insurance rate is 4%.
If you subtract $15,000 from $300,000, this equals $285,000. The 4% default insurance premium rate is based on $285,000. This equals $11,400.
Paying for mortgage default insurance
Some good news for home buyers is their insurance premiums are simply added on top of the mortgage and paid off over time. That makes it different from other closing costs, legal fees or land transfer taxes. That means if you are taking out $285,000 as a mortgage and your insurance premium is $11,400, the total amount you will need to borrow from a lender is $296,400. Your payments will be based on this amount.
Pay less default insurance
This can be done by increasing the down payment amount or percentage. To reduce the rate of default insurance, you need to increase your down payment to the next price-break point. If you are making a 5% to 9.99% down payment, you need to get to 10.00% to reduce the rate from 4% to 3.1%. You can do this either by increase the amount of your down payment, or reducing the price of the property. This will have a compounding effect by paying a lower rate on a lower amount.