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Mortgage default insurance is often referred to as CMHC insurance. This is because of the market share controlled by Canadian Mortgage and Housing Corporation. Other default insurance providers in Canada are Sangen (formerly Genworth) and Canada Guaranty.
Mortgage borrowers must meet specific eligibility criteria to qualify for this default insurance. These borrowers must also pay the insurance premium fee.
CMHC is a Canadian federal Crown corporation mandated to provide mortgage default insurance to approved mortgage lenders in Canada.
The mortgage default insurance helps Canadians buy their house with a low down payment of less than 20% of the house price.
Mortgage default insurance is mandatory by law when applying for a mortgage loan with less than a 20% down payment.
To qualify for CMHC default insurance or those provided by other providers like Sangen and Canada Guaranty, your mortgage application will have to be approved by both the lender and the respective default insurance provider.
In Canada, by law, mortgage lenders can only provide mortgage loans to qualified homebuyers who can put down at least 20% of the home price towards purchasing the house.
Let’s face it, how many people do you know who could boast of $100,000 savings, which is what is required to buy a $500,000 house with a 20% down payment. Buying a home with a 20% down payment is even more difficult if you get into the housing market for the first time.
That is the essence of mortgage default insurance. Mortgage default insurance is a must-have if you buy a house with less than a 20% down payment.
Mortgage default helps you buy a house with only a 5% down payment, thus, allowing you to start building equity sooner.
Default insurance may also be required by your lender even if you put down more than 20% of the house value:
Mortgage default insurance protects the lender if you default on your mortgage. It does not protect you, the borrower.
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There is a charge for this default insurance coverage. You, the borrower, bear this cost. This charge is known as the default insurance premium.
The premium is most often included in your mortgage loan, but you can still choose to pay the premium upfront.
Some provinces require you to pay HST or GST on this default insurance premium. The sales tax amount must be paid upfront when closing the mortgage.
On the closing day, your lender will transmit the default insurance premium to your provider.
Increasing your down payment will reduce the amount you need to borrow to finance your house purchase, which will ultimately reduce your mortgage insurance cost.
The default insurance premium rate pricing is based on your loan-to-value (LTV) ratio. Or, better still, it is based on the mortgage loan’s proportion to the property’s value.
This premium rate is applied to the principal loan amount to determine the mortgage insurance premium.
Mortgage default insurance is meant to protect the lender against default.
Your lender may force the sale of your house if you default through a foreclosure process. The bank would then sell your home to recoup their outstanding mortgage loan.
Let’s say the bank had to go through this foreclosure process to sell your house. They will use the money from this sale to pay off your mortgage balance. If the money from the sale of your home is less than your loan balance, the default insurance provider will be required to cover the shortfall.
That is the essence of the insurance payment you make so that they will help to pay off your mortgage in situations where you cannot.
But there is a catch. The default insurance provider will do their investigation and may still come back to you for the money paid to your lender.
For example, suppose you still have a mortgage of $350,000 on your house, and you default on your mortgage. The lender took necessary legal proceedings and forced the sale of your home—the house sold for $325,000.
There is still $25,000 to fully pay off your $350,000 mortgage balance. Your default insurance will pay the lender this $25,000 shortfall and may come after you to regain the $25,000.
Mortgage default insurance premium is based on the amount borrowed. The default insurance premium will increase your loan if you pay it over time with your regular mortgage payment.
Note that the premium becomes a loan if not paid upfront, and your standard mortgage interest will also apply to this premium amount.
Standard premium % of the loan amount*
Up to and including 65% of property value
Up to and including 75% of property value
Up to and including 80% of property value
Up to and including 85% of property value
Up to and including 90% of property value
Up to and including 95% of property value
Non-traditional sources of down payment**
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It is pretty easy to calculate your default insurance premium. You will need:
The outcome is your default insurance premium value.
Here is a sample calculation:
Down payment (10%)
Loan To Property Value
Insurance Premium Rate
Mortgage default insurance cost
To qualify for a mortgage default insurance premium, you will have to qualify both the lender’s borrowing requirements and the default insurer’s borrowing requirements.
Below are the eligibility criteria:
Insured mortgages are amortized for 25 years, which is your default insurance protection timeframe. However, you will lose your default insurance protection when you refinance your mortgage or pay it off.
With that said, if you do not pay off or refinance your mortgage, the default insurance premium you paid at the time of getting your mortgage will expire on the last day. That means the day your mortgage is fully amortized, 25 years after getting the loan.
However, there are other ways to move your mortgage while still holding onto your default insurance coverage by porting or renewing your mortgage loan.
You may be eligible to port your default insurance coverage if you choose to port your mortgage rate, remaining term, remaining amortization, and balance to a new house,
Mortgage renewal is a way to extend your mortgage term without changing the outstanding loan balance. To keep your insurance coverage, you will have to renew or switch your mortgage to a lender that uses the same insurance provider as your current lender.