Mortgage Basics

What is Private Mortgage Insurance (PMI)?

What is Private Mortgage Insurance (PMI)?
Written by
  • Ashley Howard
| 13 October 2023
Reviewed, 13 October 2023
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    Private Mortgage Insurance (PMI), similar to CMHC insurance, also known in Canada as mortgage loan insurance (MLI) or mortgage default insurance, is a type of insurance that protects the lender in the event a borrower defaults on their mortgage payments. It is typically required for homebuyers who make a down payment of less than 20% on their home purchase.

    Key Takeaways

    • Private mortgage insurance is issued by private mortgage insurers but is otherwise the same as CMHC insurance. 
    • PMI is required when you have less than a 20% down payment. 
    • Sagen and Canada Guaranty are the two private mortgage default insurance providers in Canada.

    How Does PMI Work?

    When a borrower takes out a mortgage with less than a 20% down payment, the lender will require mortgage default insurance. The cost of PMI is usually added to the borrower’s mortgage. It can also be paid upfront as a lump sum payment to avoid paying interest on the premium. This mortgage insurance provides coverage for the lender in case the borrower defaults on the loan.

    If the borrower stops making mortgage payments, typically 3 months or more, the lender can take legal action against the borrower. If the mortgage payment isn’t brought up to date, legal action can proceed to foreclosure or power of sale, depending on the province. In the event of foreclosure, the lender files a claim with the PMI provider (or CMHC) to recover the difference between the sale price and the remaining balance of the loan minus any fees. 

    Private Mortgage Insurers

    Two private insurers offer private mortgage insurance in Canada: Sagen (formerly Genworth) and Canada Guaranty (formerly AIG Canada). 

    • Sagen is Canada’s leading private mortgage insurance company for over 25 years. 
    • Canada Guaranty is the only other and second-largest private mortgage insurance provider operating since 2010. 

    How Much Does PMI Cost?

    The total cost of PMI varies depending on the loan type, the down payment amount, property value, and whether the amount is paid upfront or added to the mortgage. Adding it to your mortgage means that its total cost is much higher as it is amortized over the life of the mortgage, carrying the same interest that is being charged on your mortgage. 

    Generally, PMI costs range between 2.8% to 4% of the mortgage balance for standard primary residence premiums. Rentals, secondary homes, self-employed individuals and other situations requiring mortgage insurance may have different premiums.  

    Your loan-to-value (LTV) ratio will determine your mortgage insurance premium. This means the lower your downpayment, the higher your premium will be. 

    LTV Standard Premium
    80.01% – 85% 2.80%
    85.01% – 90% 3.10%
    90.01% – 95%  4.00%

    For example, if you purchase a $400,000 property and put down 5%, your mortgage amount would be $380,000. Based on the standard premium, the PMI rate is 4% since your LTV is 95%. You would pay a premium of $15,200 for mortgage insurance ($380,000 x 0.04). 

    The insurance premium can be paid upfront or added to your mortgage. If you add the mortgage insurance amount to your mortgage, instead of your lender lending you $380,000 for the mortgage, they would instead lend you the mortgage amount plus the premium amount ($380,000 + $15,200) for a total of $395,200. Adding the premium means that a portion will be paid off with each mortgage payment, though once added, it is non-refundable and non-distinguishable from your mortgage. 

    How to Avoid PMI

    While PMI is a requirement for borrowers with less than 20% downpayment, there are strategies to avoid or eliminate PMI.

    • Make a 20% Down Payment: By making a down payment of 20% or more, borrowers can avoid the need for PMI altogether.
    • Build Equity: If you already have mortgage insurance, you can work towards building equity in your home. This can be done by making extra principal payments or regular mortgage payments. Once you reach 20% equity, you can request to remove PMI.
    • Refinance: If you have built significant equity in your home or your credit score has improved, you may be eligible to refinance your loan. However, it’s essential to consider the costs and potential savings associated with refinancing before making a decision.

    Frequently Asked Questions

    What is the biggest benefit of PMI or CMHC insurance?

    High-ratio default insurance protects the lender in case you default, as it is backstopped by the federal government. For this reduced risk on your mortgage, the lender rewards you with lower insured mortgage rates. Having access to the insured rates makes your mortgage more manageable.

    Who needs private mortgage insurance?

    If you purchase a home and put down less than 20% of the purchase price, you will need mortgage insurance. PMI protects the lender in case borrowers default on their mortgage payments.

    Does PMI cost more than CMHC insurance? 

    No, PMI does not cost more than CMHC insurance. The premiums across mortgage insurers in Canada are the same and based on LTV ratios. The only difference between the companies is that CMHC is a crown corporation (public), while Sagen and Canada Guaranty are private insurers.

    Final Thoughts 

    Private Mortgage Insurance (PMI) is a type of mortgage default insurance that protects lenders if borrowers default on their mortgage payments. It is required for borrowers who make a down payment of less than 20% on a conventional loan. 

    PMI can be an additional cost for borrowers, but there are strategies to avoid or eliminate it, such as making a 20% down payment. However, there are benefits to having PMI on your mortgage, like lower interest rates. 

    Reach out to our mortgage experts today to learn more about PMI and which mortgage options can save you money.