Paul Sanchez
If you're buying a home with a down payment of less than 20%, you will be required to obtain mortgage insurance, also known as mortgage default insurance or CMHC insurance. This insurance protects your lender in the event that you default on your mortgage. While the insurance premium can be added to your mortgage balance, several provinces in Canada charge Provincial Sales Tax (PST) on CMHC premiums, which must be paid upfront as part of your closing costs. These provinces include Ontario, Quebec, and Saskatchewan. Therefore, it is important for homebuyers to factor in the PST when preparing for closing costs to avoid any unwanted surprises or delays.
| Characteristics | Values |
|---|---|
| What is PST on mortgage insurance? | Provincial Sales Tax (PST) on mortgage default insurance premiums, where applicable, is a compulsory cost you must pay when buying a home. |
| When is it required? | When a down payment is less than 20% |
| Who pays the premium? | Your mortgage lender technically pays the premium on this insurance, but the cost is passed on to you. |
| How much does it cost? | Mortgage insurance premiums vary from 0.60% to 4.50% and are calculated as a percentage of your mortgage loan amount. |
| Which provinces charge PST? | Ontario (8%), Quebec (9%), Saskatchewan (6%) and Manitoba. |
| How to pay? | The PST must be paid upfront, along with your other closing costs, as it cannot be added to your mortgage loan. |
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What You'll Learn
Provincial Sales Tax (PST) on mortgage default insurance premiums
If you are purchasing a home with a down payment of less than 20%, you are required to obtain mortgage default insurance, also known as CMHC insurance. This insurance protects your lender in the event that you default on your mortgage. Mortgage default insurance premiums are often added to the overall mortgage balance. However, certain provinces in Canada charge Provincial Sales Tax (PST) on these premiums, which must be paid upfront as part of your closing costs. These provinces include Ontario, Quebec, and Saskatchewan. For example, if you live in Quebec and your mortgage insurance premium is $8,000, you will be charged a sales tax of $720 (9% of the premium).
The PST on mortgage default insurance premiums is a compulsory cost that you must pay when buying a home in certain provinces. While the insurance premiums can be integrated into your mortgage, the PST must be paid separately. This means that if you are buying a home in a province that charges PST on these premiums, you will need to factor this additional cost into your closing costs.
It is important to note that the requirement for PST on CMHC mortgage insurance premiums has been removed in Manitoba as part of its relief package for the COVID-19 pandemic. However, Manitoba previously charged PST on these premiums, and other provinces may also have specific concessions or requirements for PST on mortgage insurance. Therefore, it is recommended to consult with a financial advisor or check the relevant provincial website for the most up-to-date information.
The cost of mortgage default insurance can quickly add up, and it is an important consideration when purchasing a home. The premiums for this insurance vary from 0.60% to 4.50% of your mortgage loan amount, depending on your loan-to-value ratio and the size of your down payment. Additionally, there may be surcharges on your mortgage default insurance if your down payment comes from non-traditional sources, such as borrowed funds or gifts from non-immediate family members.
Overall, Provincial Sales Tax (PST) on mortgage default insurance premiums is a compulsory cost in certain provinces in Canada. This tax must be paid upfront and cannot be added to your mortgage balance. It is important to consider this additional cost when purchasing a home and to stay informed about any changes or concessions that may be specific to your province.
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PST must be paid upfront
If you are buying a home with a down payment of less than 20%, you are required to obtain mortgage default insurance. This type of insurance is sometimes referred to as CMHC insurance and protects your lender in the event that you default on your mortgage. While CMHC insurance can be added to your mortgage and paid off over time, there is one associated cost that you may need to pay for with cash: Provincial Sales Tax (PST).
PST on CMHC insurance premiums is charged in certain provinces, including Ontario, Quebec, and Saskatchewan. The tax rate varies between provinces, with Ontario charging 8%, Quebec charging 9%, and Saskatchewan charging 6%. Manitoba previously charged PST on CMHC premiums but removed the tax in 2020 as part of its COVID-19 relief package.
The PST on CMHC insurance premiums cannot be included in your mortgage balance and must be paid upfront as part of your closing costs. This means that if you are buying a home in a province that charges PST, you will need to factor this additional cost into your closing costs to avoid any unwanted surprises or delays at the time of closing.
It is important to note that the PST rate and eligibility may change over time, so it is recommended to consult with a financial advisor or check the relevant provincial websites for the most up-to-date information.
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CMHC insurance is a type of mortgage default insurance
In Canada, there are three mortgage insurance providers – Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth Canada. CMHC is a federal government agency and was Canada's largest default insurer in 2020. CMHC insurance is a type of mortgage default insurance that protects the lender in the event of the borrower defaulting on their mortgage loan. It is mandatory for buyers who have paid less than 20% of the property price upfront. This is because borrowers who make smaller down payments are considered higher risk, as they have less equity in their home and are more likely to stop making mortgage payments if they encounter financial difficulties.
Mortgage default 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% (resulting in a 95% LTV ratio), the insurance premium is 4.00% of the total mortgage amount. In contrast, a buyer who puts down 15% (resulting in an 85% LTV ratio) will pay a lower premium of 2.80%. The premium is typically added to the mortgage balance and paid off over the life of the loan, although it is not a cost that needs to be paid upfront.
In some cases, a lender may require the property to be default-insured to mitigate risk, such as if the property is in a remote location or the borrower is qualifying under a special program. Several provinces in Canada charge Provincial Sales Tax (PST) on CMHC premiums, which must be paid upfront as part of the closing costs. These include Ontario (8%), Quebec (9%), and Saskatchewan (6%). Manitoba previously charged PST on CMHC premiums but removed the tax in 2020 as part of its COVID-19 relief package.
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Private mortgage insurers have different requirements
Private mortgage insurance (PMI) is a type of mortgage insurance that homebuyers are typically required to purchase if they make a down payment of less than 20% of the home's value. PMI is designed to protect the lender, not the borrower, in the event of default on the loan. While PMI is commonly associated with conventional mortgage loans, it's important to note that different lenders and loan types may have their own requirements and variations.
Credit score considerations: Your credit score can also play a significant role in determining your eligibility for PMI and the associated costs. Generally, a higher credit score may result in lower PMI costs, while a lower credit score could lead to higher expenses. Private mortgage insurers may have varying credit score requirements or use different scoring models, so it's beneficial to assess your creditworthiness before applying for PMI.
Underwriting guidelines: Private mortgage insurers can have distinct underwriting guidelines that influence their risk assessment and pricing. Factors such as your employment history, income stability, and debt-to-income ratio may be considered differently by different insurers. Understanding these guidelines can help you choose the most suitable insurer for your financial situation.
Loan-to-value ratios: Private mortgage insurers may employ different loan-to-value (LTV) ratios to determine PMI eligibility and pricing. The LTV ratio compares the loan amount to the appraised value of the property. Some insurers may offer more competitive rates or be more lenient with higher LTV ratios, making it advantageous to compare their criteria.
Additional requirements and exclusions: Private mortgage insurers may have unique additional requirements or exclusions. For instance, some insurers may mandate a history of timely payments or prohibit a second mortgage for PMI eligibility. Understanding these specific conditions is crucial in ensuring you meet the insurer's comprehensive set of requirements.
In summary, while the basic requirement for PMI is a down payment of less than 20%, private mortgage insurers may have distinct criteria, including credit score considerations, underwriting guidelines, loan-to-value ratios, and additional requirements or exclusions. It is recommended to thoroughly research and compare multiple private mortgage insurers to identify the most suitable PMI option for your circumstances.
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Mortgage protection insurance pays off your mortgage balance if you die
Mortgage protection insurance, also known as mortgage life insurance, is a type of insurance that pays off your remaining mortgage balance if you die. This type of insurance is typically offered by banks or mortgage lenders, but it can also be purchased through unaffiliated insurers. The coverage provided by mortgage protection insurance is designed to help your loved ones pay off your mortgage loan in the event of your death or disability.
Mortgage protection insurance policies have a specified period of coverage, usually 15 or 30 years, and the death benefit can be structured in different ways. Some policies tie the death benefit to the outstanding mortgage principal, while others may have a fixed benefit for the first few years, followed by a decrease at a specified rate over the life of the policy. It's important to note that mortgage protection insurance only covers the remaining loan balance and interest charges, and does not cover other expenses such as property taxes or homeowners insurance.
The payout from mortgage protection insurance goes directly to the mortgage lender, rather than a beneficiary chosen by the policyholder. This means that the policyholder's loved ones won't have the flexibility to use the payout for other expenses as they would with a standard life insurance policy. Additionally, mortgage protection insurance tends to be more expensive than term life insurance due to its more flexible underwriting criteria, which does not require a medical exam for qualification.
While mortgage protection insurance can provide peace of mind and help ensure that your loved ones can keep their home, it may not be the best option for everyone. Term life insurance, for example, often offers greater flexibility and can provide funds for beneficiaries to balance mortgage payoff and other financial responsibilities. It is generally recommended to compare different types of insurance policies and consider factors such as age, health, and financial situation before making a decision.
In some provinces in Canada, such as Ontario, Quebec, and Saskatchewan, mortgage default insurance premiums are subject to Provincial Sales Tax (PST). This tax must be paid upfront as part of the closing costs and cannot be included in the mortgage balance. It is important for homebuyers to consider these additional costs when purchasing a home in these provinces.
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Frequently asked questions
PST stands for Provincial Sales Tax, which is charged on mortgage default insurance premiums in some provinces. This tax must be paid upfront as part of the closing costs and cannot be added to the mortgage balance.
PST on mortgage insurance is currently applicable in Ontario, Quebec, and Saskatchewan. Manitoba previously charged PST on mortgage insurance but removed it in 2020 as part of its COVID-19 relief package.
The borrower is responsible for paying the PST on mortgage insurance. While the mortgage insurance premium can be added to the mortgage balance, the PST on the premium must be paid in cash upfront.
