Mortgage Default Insurance (CMHC Insurance)

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: it 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 return 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 pay off your $350,000 mortgage balance fully. Your default insurance will pay the lender this $25,000 shortfall and may come after you to regain the $25,000.