Jane Dotson
Mortgage default insurance, also known as CMHC insurance, is an important aspect of the home-buying process. It is a type of insurance that protects lenders in the event of a borrower's non-payment or default on their mortgage. This insurance is particularly relevant for borrowers who are unable to make a 20% down payment, which is typically required for a conventional mortgage. By purchasing mortgage default insurance, borrowers can access financing for their dream homes, even with a smaller down payment. The cost of this insurance is calculated based on a percentage of the loan amount and the size of the down payment, with a higher down payment resulting in a lower insurance premium. Various online calculators are available to help estimate the monthly premiums and provide a comprehensive view of the costs associated with owning a home.
| Characteristics | Values |
|---|---|
| Purpose | Protects lenders in case the buyer defaults on mortgage payments |
| Who pays | The borrower is responsible for paying the insurance premium |
| When to pay | Calculated upfront when the mortgage is funded |
| Payment mode | Paid initially by the lender on the borrower's behalf and added to the principal amount of the mortgage |
| Payment period | Repaid by the borrower through mortgage payments over the same amortization period as the mortgage |
| Sales tax | Paid upfront as part of closing costs |
| Minimum down payment requirement | 5% for homes valued under $500,000; 5% for the first $500,000 and 10% for the remaining value for homes valued between $500,000 and $999,999; 20% for homes valued at $1 million or more |
| Maximum amortization period | 25 years for properties valued above $1 million; 30 years for first-time homebuyers or new constructions |
| Loan-to-value (LTV) ratio | Determined by dividing the amount borrowed by the appraised value or purchase price of the property, whichever is lower; a higher LTV ratio results in a higher insurance premium |
| Insurance providers | CMHC, Sagen, and Canada Guaranty |
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What You'll Learn
Calculating the loan-to-value (LTV) ratio
The Loan-to-Value (LTV) ratio is a number used by lenders to determine the financial risk of a mortgage. It is calculated by dividing the amount borrowed by the appraised value or purchase price of the property, whichever is lower. The LTV ratio is then multiplied by 100 to get a percentage.
For example, if you buy a home appraised at $100,000, but the owner is selling it for $90,000, and you make a $10,000 down payment, your loan is for $80,000. Dividing $80,000 by $100,000 gives an answer of 0.8, which, when multiplied by 100, gives an LTV ratio of 80%.
Lenders use the LTV ratio to determine the amount necessary for a down payment and whether they will extend credit to a borrower. A lower LTV ratio is better, as it indicates that the borrower has made a larger down payment. Most lenders offer the lowest possible interest rates when the LTV ratio is at or below 80%. If the LTV ratio is higher than 80%, the interest rate on the loan may increase, and the borrower may be required to purchase private mortgage insurance (PMI).
Mortgage default insurance, also known as CMHC insurance or high-ratio insurance, is mandatory for buyers who have paid less than 20% of the down payment on a home priced below $1 million. The insurance premium is calculated based on the borrower's LTV ratio, with a higher LTV ratio resulting in a higher insurance premium percentage. For example, a homebuyer who puts down 5% will have a 95% LTV ratio and will pay an insurance premium of 4% of the total mortgage amount. In contrast, a buyer who puts down 15% will have an 85% LTV ratio and will pay a lower premium of 2.80%.
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Down payment percentage
The down payment percentage is a critical factor in determining the mortgage default insurance premium. The higher the percentage of the total home purchase price and the amount borrowed, the higher the insurance premium percentage.
The down payment percentage is used to calculate the loan-to-value (LTV) ratio, which is the total mortgage amount divided by the property's purchase price or appraised value, whichever is lower. A higher LTV ratio, indicating a smaller down payment, results in a higher insurance premium. For instance, a 5% down payment leads to a 95% LTV ratio and a 4.00% insurance premium, while a 15% down payment results in an 85% LTV ratio and a lower premium of 2.80%.
In Canada, mortgage default insurance is mandatory for buyers who have paid less than 20% of the home's purchase price, with the minimum down payment requirement being 5% for the first $500,000 and 10% for any portion above that. If the home price is over $1,500,000, a down payment of 20% or more is required, and mortgage default insurance is not available.
The mortgage default insurance premium is calculated upfront and paid initially by the lender, who then adds it to the principal amount of the mortgage. The borrower repays the lender over the same amortization period as the mortgage. It is important to note that the sales tax on the premium, if applicable, is a one-time lump-sum payment made upfront.
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Mortgage default insurance premium
Mortgage default insurance, also known as CMHC insurance, is mandatory in Canada for buyers who have paid less than 20% of the down payment on their home's purchase. It is calculated based on the borrower's loan-to-value (LTV) ratio, which is the total mortgage amount divided by the property's purchase price or market value, whichever is lower. The higher the LTV ratio, the higher the insurance premium percentage.
For example, if a homebuyer puts down 5% (resulting in a 95% LTV ratio), the insurance premium is around 4.00% of the total mortgage amount. On the other hand, someone who puts down 15% (resulting in an 85% LTV ratio) will pay a lower premium of approximately 2.80%.
To calculate the mortgage default insurance premium, you can use the following formula:
> Principal mortgage amount (excluding premium) ÷ purchase price or market value if lower (lending value) x premium percentage = mortgage default insurance premium
For instance, if you purchase a home for $500,000 and make a 10% down payment of $50,000, the principal amount of your mortgage would be $450,000, and your LTV ratio would be 90%. Assuming a premium percentage of 2.8%, the mortgage default insurance premium would be calculated as follows:
> $450,000 ÷ $500,000 x 2.8% = $12,600
Therefore, the mortgage default insurance premium for this scenario would be $12,600.
It is important to note that the mortgage default insurance premium is typically paid upfront by the lender on the borrower's behalf and then added to the principal amount of the mortgage. The borrower repays the lender through their mortgage payments over time. Additionally, sales tax on the premium may be charged upfront as part of the closing costs, depending on the province or territory.
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Provincial sales tax (PST)
Mortgage default insurance, also known as CMHC insurance, is required for homebuyers in Canada who have paid less than 20% of the down payment on their home. This insurance is calculated based on the borrower's loan-to-value (LTV) ratio, which is the total mortgage amount divided by the property's purchase price. The higher the LTV ratio, the higher the insurance premium percentage. For example, if a homebuyer puts down 5% as a down payment, resulting in a 95% LTV ratio, the insurance premium is 4.00% of the total mortgage amount.
When calculating the PST on mortgage default insurance, it is important to note that the tax is applied to the insurance premium amount. The formula to calculate the PST amount is as follows:
PST amount = Insurance premium x PST rate
For example, if you are purchasing a home in Ontario with a mortgage default insurance premium of $5,000, the PST amount would be:
PST amount = $5,000 x 8% = $400
Therefore, in addition to the mortgage default insurance premium, you would need to pay $400 in PST upfront as part of your closing costs.
It is important to consult with a financial advisor or refer to provincial websites to stay updated on any changes or concessions related to PST rates and eligibility.
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Minimum down payment requirements
In Canada, mortgage default insurance, also known as CMHC insurance, is mandatory for buyers who have paid less than 20% of the purchase price of their home. This insurance is calculated based on the borrower's loan-to-value (LTV) ratio, which is the total mortgage amount divided by the property's purchase price. The higher the LTV ratio, or the smaller the down payment, the higher the insurance premium percentage.
For example, if a homebuyer puts down 5% as their down payment, resulting in a 95% LTV ratio, the insurance premium is 4.00% of the total mortgage amount. On the other hand, a 15% down payment, resulting in an 85% LTV ratio, will incur a lower premium of 2.80%.
The minimum down payment in Canada is 5% for the first $500,000 of the property's value and 10% for any portion above that threshold. For properties priced over $1,500,000, a down payment of greater than 20% is required.
Mortgage default insurance is not a requirement for borrowers with an LTV ratio of 80% or less. However, if a borrower's LTV ratio exceeds 80%, their lender must purchase mortgage default insurance on their behalf from one of three national default insurers: CMHC, Genworth, or Canada Guaranty.
It is worth noting that even if a borrower meets the 20% down payment threshold, their lender may still require them to obtain mortgage default insurance if they assess the transaction as high risk. In such cases, borrowers may need to explore alternative lending options if they wish to avoid purchasing mortgage default insurance.
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Frequently asked questions
Mortgage default insurance, also known as CMHC insurance or high-ratio insurance, protects the lender in the event that the buyer defaults on mortgage payments. It is mandatory for buyers who have paid less than 20% of the home's purchase price upfront.
The LTV ratio is calculated by dividing the amount borrowed by the appraised value or purchase price of the property, whichever is lower. For example, if you have a 5% down payment, the LTV ratio is 95%—another way of saying your mortgage represents 95% of your home’s value.
The mortgage default insurance premium is calculated based on the LTV ratio. The higher the LTV ratio, the higher the premium will be. The premium will be somewhere between 2.8% and 4% of your mortgage amount.
The only way to minimise mortgage default insurance payments is to either make a larger down payment or buy a less expensive home.
