Mortgage Insurance in Canada: Everything You Need to Know

Mortgage insurance is a crucial yet often misunderstood aspect of homeownership in Canada. The Federal Housing Administration (FHA) plays a significant role in mortgage insurance by backing mortgages and requiring borrowers to pay a Mortgage Insurance Premium (MIP). For many prospective buyers, particularly first-time homebuyers, understanding mortgage insurance can help clarify costs and benefits, as well as the rules surrounding different types of mortgages. This article will explore what mortgage insurance is, who benefits from it, and provide detailed answers to common questions about insured, insurable, and uninsurable mortgages in Canada.

Types of Mortgage Insurance

Mortgage insurance is a type of insurance that protects lenders from losses due to the default of a mortgage loan. There are several types of mortgage insurance, including:

1. Private Mortgage Insurance (PMI): PMI is typically required with most conventional (non-government backed) mortgage programs when the down payment or equity position is less than 20% of the property value. PMI rates can range from 0.14% to 2.24% of the principal balance per year based on the percentage of the loan insured, loan-to-value (LTV) ratio, interest rate structure, and credit score. This type of insurance allows borrowers to purchase a home with a smaller down payment while providing lenders with the security they need.
2. Mortgage Default Insurance: Mortgage default insurance is a type of insurance that protects lenders from losses due to the default of a mortgage loan. It is typically required for homebuyers who put down less than 20% of the home’s purchase price. This insurance is mandatory for high-ratio mortgages in Canada and is provided by organizations like CMHC, Sagen, and Canada Guaranty. The insurance premium is calculated as a percentage of the mortgage amount and can be added to the mortgage balance.
3. Mortgage Life Insurance: Mortgage life insurance is an optional product that may pay the outstanding mortgage balance to the lender upon the borrower’s death. This type of insurance can be beneficial for those with dependents or a spouse who would like to remain in the home after the borrower’s passing. Unlike traditional life insurance, mortgage life insurance specifically covers the mortgage debt, ensuring that the home is paid off.
4. Mortgage Protection Insurance: Mortgage protection insurance pays off the balance of the mortgage if one of the borrowers passes away. Some mortgage protection insurance policies also cover mortgage payments if the borrower loses their job or becomes disabled. This type of insurance provides peace of mind by ensuring that the mortgage will be paid under unforeseen circumstances, protecting both the borrower and the lender.
5. Critical Illness Insurance: Critical illness insurance may make mortgage payments to your lender if you can’t work due to a severe injury or illness. Most insurance plans have specific conditions attached, including a list of covered illnesses or injuries. This insurance can be a valuable safety net, helping to maintain mortgage payments during challenging times.
6. Mortgage Loan Insurance: Mortgage loan insurance is a type of insurance that protects lenders from losses due to the default of a mortgage loan. It is typically required for homebuyers who put down less than 20% of the home’s purchase price. This insurance is similar to mortgage default insurance and is often used interchangeably. It ensures that lenders are protected, allowing them to offer mortgages to a broader range of borrowers.

It’s important to note that mortgage insurance is not the same as life insurance or disability insurance, and it does not provide any benefits to the borrower. It is solely designed to protect the lender from losses due to the default of a mortgage loan. Understanding the different types of mortgage insurance can help you make informed decisions about your home financing options.

Who Benefits from Mortgage Insurance?

Both lenders and borrowers benefit from mortgage insurance:

• Lenders: Mortgage insurance protects lenders against the risk of default, enabling them to lend to borrowers who may not meet the traditional 20% down payment threshold.
• Borrowers: For borrowers, mortgage insurance provides access to homeownership with a smaller down payment. It also often allows borrowers to access lower interest rates because the lender’s risk is reduced.

How Expensive Are Mortgage Insurance Premiums?

The cost of mortgage insurance in Canada depends on the size of the down payment and the mortgage amount. The premium is calculated as a percentage of the mortgage amount and ranges from 2.8% to 4.0% for CMHC-insured loans. The smaller the down payment, the higher the premium rate.

The mortgage insurance cost is calculated as a percentage of the total mortgage amount, impacting homeowners through premiums, added interest on the mortgage amount, and potential provincial sales tax.

For example:

• 5% Down Payment: The premium is 4.0% of the mortgage amount.
• 10% Down Payment: The premium is 3.1% of the mortgage amount.
• 15% Down Payment: The premium is 2.8% of the mortgage amount.

The mortgage insurance premium can be paid upfront or added to the mortgage and included in the monthly payments.

What Is an Insured Mortgage, as It Pertains to the CMHC?

An insured mortgage is a loan that has mortgage insurance coverage provided by CMHC or another insurer. These loans are typically high-ratio mortgages, where the down payment is less than 20%. The insurance ensures that lenders are protected from losses if the borrower defaults. CMHC-insured mortgages must meet certain criteria, such as:

• The home price must be below $1,500,000.
• The amortization period must be 25 years or less.

What Is an Insurable Mortgage?

An insurable mortgage is one that meets the criteria for mortgage insurance but does not necessarily require the borrower to pay for it. These mortgages typically involve a down payment of 20% or more. Mortgage insurance premiums are required if the homeowner’s equity in the property is less than 20%. Lenders may opt to insure such loans to reduce their risk, even though the borrower’s down payment is substantial. Insurable mortgages generally qualify for lower interest rates because of the added security the insurance provides to the lender.

What Is an Uninsurable Mortgage?

An uninsurable mortgage does not qualify for mortgage insurance due to factors such as:

• The purchase price exceeding $1,500,000.
• The property type (e.g., certain investment properties).

Provincial sales tax is applicable in certain provinces such as Manitoba, Ontario, Saskatchewan, and Quebec and must be paid upfront, adding to the overall financial burden for homebuyers.

Borrowers with uninsurable mortgages must typically provide a down payment of at least 20%. Because these mortgages carry higher risk for lenders, they often come with higher interest rates.

What Happens to CMHC Insurance if You Sell Your Home and Buy a New One?

CMHC insurance is tied to the specific mortgage and property it was purchased for and is not transferable. If you sell your home and buy a new one, you will need to pay for new mortgage insurance if the new mortgage requires it. However, if you port your mortgage to the new property (i.e., transfer your existing mortgage with the same lender and terms), you may be able to avoid paying a new insurance premium, provided the new home meets the insurer’s requirements.

If you are renewing your mortgage, your CMHC insurance stays with you.

How Can You Lower or Eliminate Your Mortgage Insurance with a Larger Down Payment?

To avoid or reduce mortgage insurance costs, consider the following strategies:

1. Increase Your Down Payment: Making a down payment of at least 20% eliminates the need for mortgage insurance.
2. Choose a Less Expensive Home: Reducing the purchase price can lower the mortgage amount, resulting in a smaller premium.
3. Boost Your Credit Score: A strong credit score can help you qualify for more favorable mortgage terms, reducing costs.
4. Save for a Larger Down Payment: While this may delay your home purchase, it can save you thousands in insurance premiums over the long term.

How Can You Insure an Insurable Mortgage?

For an insurable mortgage, lenders may decide to purchase portfolio insurance to cover a group of mortgages. This is often done for conventional mortgages with down payments of 20% or more. While borrowers do not directly pay for this insurance, it can result in lower interest rates because the lender’s risk is reduced. If you are considering an insurable mortgage, discuss the details with your lender to understand how they handle portfolio insurance and whether it impacts your loan terms.

Final Thoughts

Mortgage insurance plays a pivotal role in the Canadian housing market, making homeownership accessible to many who might otherwise struggle to save a large down payment. By understanding the differences between insured, insurable, and uninsurable mortgages—as well as the costs and benefits of mortgage insurance—borrowers can make informed decisions about their home financing options. Whether you’re a first-time homebuyer or a seasoned property owner, knowing your options can save you money and provide peace of mind as you navigate the path to homeownership.