Mortgage Basics

What Is Mortgage Loan Insurance?

What Is Mortgage Loan Insurance?
Written by
  • Alivia Massimillo
| 3 April 2023
Reviewed, 28 May 2024
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    Mortgage loan insurance, also known as mortgage default insurance, protects the lender if you default on your mortgage payments – meaning the lender can recover the remaining mortgage balance at the time of default on your loan. This type of insurance is required if you have less than 20% to put toward a down payment when purchasing a home. 

    Mortgage loan insurance alleviates some of the risks to the lender when you apply for a mortgage – allowing buyers to purchase a home even if they have less than 20% of the purchase price – avoiding waiting until you have 20% saved up to purchase. 

    Canada’s main mortgage loan insurance provider is Canada Mortgage and Housing Corporation (CMHC), a crown corporation. Still, other private lenders offer this type of insurance, like Sagen (formerly Genworth) and Canada Guaranty.

    Key Takeaways

    • Mortgage insurance is required when purchasing a home with a down payment of less than 20%. 
    • Canada’s main mortgage loan insurance providers include Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth), and Canada Guaranty. 
    • The higher your down payment amount – the lower your mortgage default insurance premium (2.8% to 4%).

    How do I know if my mortgage is subject to loan insurance?

    Lenders will require mortgage loan insurance if you have a down payment of less than 20% (this is considered a high-ratio mortgage). If your mortgage is subject to mortgage loan insurance, you may fit into one of the following scenarios: 

    • If you are looking to purchase a home with a purchase price of $500,000 or less – you will require at least a minimum down payment of 5%.
    • If you are looking to purchase a home with a purchase price of more than $500,000 – you will require a minimum 5% down payment on the first $500,000 and a minimum 10% down payment on the remaining amount. 

    It’s important to note that some mortgages are not eligible for mortgage loan insurance. Properties intended to be used as rental units, with a purchase price of $1,000,000 or more, or loans amortized for more than 25 years can not be insured. Additionally, if you decide to refinance or get a second mortgage on your home – you won’t be eligible for mortgage default insurance.

    How will mortgage insurance impact monthly payments? 

    The cost of this insurance will depend on the type of loan, the amount of your down payment, the property value, and whether you decide to pay the amount up front or add it as part of your monthly payments. Adding the amount as part of your monthly payments will increase your interest-carrying cost – making it a more expensive option than an upfront payment. 

    Your loan-to-value (LTV) ratio is the determining factor for the mortgage default insurance premium. The premiums for mortgage default insurance are calculated based on this LTV ratio – meaning the higher your LTV ratio, the higher the premium will be. This is calculated by dividing the amount you are borrowing by the appraised value or the home’s purchase price – whichever amount is lower. 

    Loan-to-Value Premium on Total Loan
    80.01% to 85% 2.80%
    85.01% to 90% 3.10%
    90.01% to 95% 4.00%
    [High-ratio default insurance premium rates based on CMHC LTV ratios. Source: CMHC]

    Examples of these insurance costs:

    Say you’re looking to purchase a $500,000 property with a 5% down payment ($500,000 x 0.05 = $25,000); you would be left with a mortgage amount of $475,000 ($500,000 – $25,000 = $475,000). 

    You must add the mortgage insurance premium since you put down less than 20%. From the table above, you can see since you are putting 5% down, that leaves 95% of the value left – meaning you will pay a 4% premium on the loan. This can be calculated as $475,000 x 4% (0.04) =  $19,000. 

    This insurance premium can be paid upfront or added to your mortgage. If the amount is added to your mortgage, instead of your lender lending you $475,000, they would lend you $494,000 ($475,000 + $19,000), and then a portion of your premium would be paid off with each mortgage payment.

    How do you pay for your loan insurance on your mortgage?

    Mortgage insurance, in most cases, is financed through your mortgage. You will, however, have the option to pay this amount upfront as a lump sum payment to reduce your interest-carrying costs. Typically it is added to your mortgage amount and paid off throughout the life of your mortgage – keeping in mind this will increase your interest-carrying costs, making it the more expensive option. 

    Frequently Asked Questions

    What is mortgage loan insurance?

    Mortgage insurance is a guarantee to protect the lender from a borrower defaulting – allowing borrowers to purchase a home with less than a 20% down payment. 

    Who pays for mortgage loan insurance?

    The borrower pays insurance when less than 20% is put down toward purchasing a home. This premium can be paid either as a lump sum or blended into your mortgage and paid off over the life of the mortgage. 

    Is mortgage loan insurance required?

    Mortgage insurance is required when a borrower has less than 20% to put toward a down payment on a home. 

    Is there an alternative to mortgage loan insurance?

    Yes, mortgage insurance is not required if you put a 20% or more down payment toward the purchase price of your home. 

    How can I get the best rate on my mortgage insurance?

    Putting down more toward your down payment will ensure you get the best rate on your mortgage loan insurance. For example: If you put 5% down, the premium is 4%, whereas if you put down 15%, the premium is 2.8%. 

    What are some of the benefits of having mortgage loan insurance?

    Some benefits to having mortgage default insurance include the ability to purchase a home with a lower down payment – making it easier for those with limited savings to enter the housing market. There is also an advantage in that mortgage rates are generally more competitive when you have insurance because there is less risk to lenders when mortgages are default insured.

    Final Thoughts

    Insurance for your mortgage loan is a necessary component of your mortgage when purchasing with less than a 20% down payment. Knowing the potential premiums associated with your down payment amount is essential to budget and prepare for this additional expense – whether you plan to pay it as a lump sum or roll it into your mortgage payments. Remember, the higher the percentage you put down, the less your premium will be while benefiting from better mortgage rates.