What Is Mortgage Default Insurance?

What Is Mortgage Default Insurance?
When thinking about buying a new home it is important to know that Canadian banks can only provide mortgage financing to qualified homeowners with at least a 20% down payment, unless the mortgage is insured against default. 
 
This is where CMHC, Sagen & Canada Guaranty come in. They all offer mortgage default insurance (also known as mortgage loan insurance). CMHC is a publicly owned corporation while Sagen (formerly known as Genworth Financial Canada) & Canada Guaranty are privately owned. For the purposes of this blog we will be discussing CMHC mortgage default insurance.
 
What is CMHC? 
CMHC or Canadian Mortgage Housing Corporation “exists for a single reason: to make housing affordable for everyone in Canada”. 
One of the many ways they are trying to achieve this goal is by offering mortgage default insurance to potential buyers who don’t have the 20% down payment required in Canada to buy a home. 
The mortgage default insurance allows the buyer to get a mortgage for up to 95% of the value of the home and it protects the lender if you default on your mortgage.
 
To qualify for mortgage loan insurance, you’ll need a minimum down payment. The amount depends on the home’s purchase price:
If the home costs:
💰$500,000 or less, you’ll need a minimum down payment of 5%.
💰💰$500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.
💰💰💰$1,000,000 or more, mortgage loan insurance is not available.
 
How much does it cost and who pays it?
💵 Technically the lender pays for the insurance because it protects them, it is likely that they will pass it on to the buyer. 
💵 It’s calculated as a percentage of the mortgage and is based on the size of the down payment.
💵 You can pay it in a lump sum or add it to your mortgage and include it in your payments.
 
What are the general requirements to qualify?
✔️The home must be located in Canada.
✔️The maximum purchase price or as-improved property value must be below $1,000,000.
✔️The minimum downpayment comes from your own resources. (check with your lender for full qualifying criteria)
✔️Your total monthly housing costs shouldn't represent more than 32%* of your gross household income.
✔️Your total debt load shouldn’t be more than 40%* of your gross household income.
✔️Don’t forget about closing costs.
 
*Please note that other requirements may apply and are subject to change. These ratios serve as guidelines and you may still qualify for a mortgage, even if your GDS and TDS are slightly higher than the industry standards. For details, please contact your lender or mortgage broker.
 
How can you calculate your CMHC?
Step 1: Calculate your down payment as a percentage of the full price. 
Down payment divided by purchase price = Your down payment as a percentage of the full price.
 
Step 2: Calculate the amount you need for the mortgage
Purchase price – Down payment = The amount you need for the mortgage.
 
Step 3: Calculate the insurance premium for your mortgage
The amount you need for your mortgage X insurance rate = mortgage default insurance premium

For more information please visit: CMHC mortgage loans for consumers.