Mortgage insurance 101: What it is, how it works – and when you need it

Mortgage loan insurance is one of those things most of us never think about until we have to. But according to Canada Mortgage and Housing Corporation (CMHC) – Canada’s national housing agency and the largest provider of mortgage loan insurance in the country – every year, thousands of Canadians apply for mortgage insurance to help them make their dreams of homeownership a reality.

But what exactly is mortgage loan insurance, how does it work – and when (or why) do you need it?

What is mortgage loan insurance?

Mortgage loan insurance (also often called “mortgage default insurance,” or simply “mortgage insurance”) is a type of insurance that’s taken out by homebuyers who want to purchase a property in Canada, but whose down payment is less than 20% of the purchase price of the home.

The purpose of mortgage insurance is to protect the lender against the risk of default if you stop making payments. In Canada, in addition to CMHC, mortgage loan insurance is also offered by two private insurers: Sagen (previously known as Genworth Canada) and Canada Guaranty.

How does it work?

The reason mortgage insurance exists is to help more new, first-time and other buyers purchase a home without first having to save up a full down payment of 20% or more.

Even though it’s paid for by the homebuyer, mortgage insurance actually protects the lender by covering any shortfall if they have to foreclose on a property, and the amount they sell it for is less than the total outstanding portion of the loan.

By reducing the risk, mortgage insurance lets banks and other lenders offer mortgages at a lower rate than they’d normally be able to, and provide mortgages to people without a 20% down payment who otherwise wouldn’t be able to buy a home of their own.

When do you need it?

Mortgage loan insurance is mandatory for everyone who buys a house, condo, apartment or any other residential property with less than 20% of the purchase price down.

If your lender determines you need mortgage loan insurance before they can approve you for a mortgage, they’ll usually work with you to match you with an insurance provider and help you get started with the application.

According to federal law, mortgage loan insurance is currently only available on properties valued at less than $1.5 million. For properties above the $1.5-million mark, buyers must provide the minimum down payment of at least 20% from their own resources, and therefore don’t need to insure their mortgages against default.

How much does it cost?

The cost of mortgage loan insurance depends on two factors: the purchase price of the property, and the size of your down payment.

Generally speaking, the larger your down payment is, the lower your mortgage insurance premiums will be. For the vast majority of Canadians, however, the cost of insuring a mortgage against default usually works out to between 2.8% to 4.0% of the total value of the mortgage.

For a $1-million mortgage, for example, the cost of mortgage insurance would work out to between $28,000 to $40,000. While some buyers pay the insurance in a lump sum upfront, most choose to add it to their regular monthly mortgage payments, and pay it off little by little over the lifetime of their mortgage.

Want to find out if you need mortgage loan insurance?

If you’re a first-time, new or experienced homebuyer and want to find out whether or not you need mortgage loan insurance, contact us to set up a free phone call or in-person consultation to go over your finances, your goals – and to let us know exactly what you’re looking for in a home.