Mortgage Default Insurance: Your Questions Answered
Learn more about mortgage default insurance, what it covers and how much it costs while gaining insight into Canada’s top three mortgage default insurance providers.
What is Mortgage Default Insurance?
In Canada, mortgage default insurance (often referred to as mortgage insurance) is necessary on all home purchases with a down payment of less than 20%. This type of insurance ultimately serves three purposes:
- Protect the lender in the event a borrower defaults on their loan.
- Stabilize the market and keep mortgage rates at a reasonable low (without it, rates would skyrocket as borrowers would be more likely to default)
- Allow lenders to offer home buyers with lower down payments the same low rates as borrowers with more equity.
While all home buyers require a minimum of 5% down to purchase a home, mortgage insurance allows them to realize the dream of homeownership without the need for a large sum upfront.
More on the Minimum
As we mentioned, the minimum down payment required to purchase a home in Canada is 5%. However, this amount may vary according to purchase price. As per the Canada Mortgage and Housing Corporation (CMHC):
- If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
- If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder (i.e. for a home with a purchase price of $550,000 would require a minimum down payment of $30,000: 5% on $500,000 and 10% on the remaining $50,000).
- Homes with a purchase price of $1,000,000 or more are not eligible for mortgage loan insurance.
How Much Does Mortgage Default Insurance Cost?
Mortgage loan insurance is calculated as a percentage of your overall mortgage loan, based on the size of your down payment. The more you borrow, the higher your mortgage insurance payments will be. For instance, a buyer with the minimum 5% will have to borrow more (and therefore pay a higher premium) than a buyer with 10%.
According to the experts, mortgage insurance typically costs Canadians between 2.80% and 4.00% of their overall mortgage amount. This can be paid out in one large lump sum or added to your monthly mortgage payments. A mortgage calculator can help you determine the size of your down payment and how much home you can afford.
How Do I Qualify For Mortgage Default Insurance?
While qualification criteria will depend on which mortgage insurers you partner with (more on Canada’s available mortgage insurers below) home buyers seeking a CMHC mortgage will need to meet the following requirements:
- A minimum credit score of 680
- A Gross Debt Service (GDS) ratio of less than 35%
- A Total Debt Service (TDS) ratio of less than 42%
- Traditional sources of down payment only (you cannot borrow money for your down payment)
For more information on the CMHC’s mortgage rules, see our previous post: New CMHC Mortgage Rules: What Do They Mean For Home Buyers?
Where Do I Get Mortgage Default Insurance?
Canada’s top three mortgage default insurance providers include:
For additional mortgage assistance, we recommend working with a reputable Edmonton mortgage broker. You can also check out the latest Edmonton real estate listings and market trends by visiting us at the Edmonton Pro Real Estate Group.
Photo credits: shutterstock.com
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