Purchasing a home is often one of the most significant investments we make. However, accumulating the necessary funds for a substantial down payment can be challenging for many aspiring homeowners in Canada. This is where understanding mortgage insurance plays a vital role in facilitating homeownership and mitigating risks for lenders and borrowers. Let’s learn more about mortgage insurance in Canada so that you can optimize your financial planning, ensure prudent risk management, and embark on your homeownership journey with a sense of security and peace of mind.
What is Mortgage Insurance?
Mortgage insurance is designed to protect the lender in the event of default on a mortgage loan. When purchasing a home with a down payment of less than 20 per cent of the property’s value, lenders require borrowers to obtain mortgage insurance. The primary purpose of this insurance is to mitigate the risks faced by financial institutions when extending mortgages with higher loan-to-value (LTV) ratios.
For lenders, mortgage default insurance acts as a safeguard, helping ensure they are compensated if the borrower fails to meet their mortgage obligations, such as making timely monthly payments. This assurance enables lenders to offer mortgage loans to a broader range of buyers, including those with limited down payment savings, thus promoting homeownership opportunities for many Canadians.
From the borrower’s perspective, mortgage insurance allows them to access more favourable loan terms, including lower interest rates, even with a smaller down payment. It reduces the barriers to entry into the housing market, making homeownership a viable option for individuals who might otherwise struggle to accumulate a substantial down payment.
Types of Mortgage Insurance
In Canada, mortgage insurance comes in various forms, each tailored to specific borrower needs and financial situations:
Canada Mortgage and Housing Corporation (CMHC) is a government-owned agency that provides mortgage insurance to lenders nationwide. CMHC insurance is primarily designed for borrowers with down payments below 20 per cent of the home’s purchase price. CMHC offers mortgage insurance with LTV ratios of up to 95 per cent, making it a popular choice for first-time homebuyers. Borrowers can pay the CMHC insurance premium upfront or add it to their mortgage principal.
Private Mortgage Insurance (PMI) (or mortgage default insurance) is offered by private insurers and is an alternative to CMHC insurance. PMI is typically required when a borrower’s down payment is below 20 per cent of the home’s value. Depending on the borrower’s financial profile, PMI providers may offer more flexibility in premium structures and eligibility criteria.
Mortgage Payment Protection Insurance (MPPI), also known as mortgage insurance that covers your payments, provides financial protection to homeowners in case they cannot meet their mortgage payments due to unexpected events or circumstances. If the insured individual experiences an unforeseen event, such as job loss, illness, disability, or accident, and cannot make mortgage payments, the insurance policy covers the payments directly to the lender. MPPI typically offers coverage for a specific benefit period, usually 12 to 24 months.
Mortgage Life Insurance (LI) is a separate type of insurance that is not required but rather complements traditional mortgage insurance. Unlike CMHC and PMI, LI is designed to protect the borrower’s family in case of the borrower’s untimely passing. In the event of the insured borrower’s death, LI pays off the remaining mortgage balance, relieving the borrower’s family from the financial burden.
Factors Affecting Mortgage Insurance Premiums
When obtaining mortgage insurance in Canada, several factors come into play that can influence the cost of premiums. Understanding these factors is essential for borrowers to plan their finances effectively and make informed decisions about the most suitable mortgage insurance option. The key factors affecting mortgage insurance premiums include:
Loan-to-Value (LTV) Ratio – The Loan-to-Value ratio is a critical determinant of mortgage insurance premiums. LTV ratio is calculated by dividing the mortgage amount by the property’s appraised value. The higher the LTV ratio, the greater the risk for the lender. As a result, borrowers with a higher LTV ratio are likely to face higher insurance premiums.
Down Payment Size – The down payment size is inversely proportional to the mortgage insurance premium. A larger down payment reduces the loan amount and decreases the risk to the lender. Consequently, borrowers with a more substantial down payment typically benefit from lower insurance premiums.
Borrower’s Credit Score and Financial History – Lenders assess a borrower’s creditworthiness and financial history to gauge the risk of default. A stronger credit profile can improve approval odds and mortgage terms, while mortgage default insurance premiums are driven mainly by the loan-to-value (LTV) ratio and down payment.
Common Mortgage Insurance Mistakes to Avoid
Default Insurance and Mortgage Life Insurance Are Not the Same
PMI or mortgage default insurance is usually required when your down payment is under 20%, and it protects the lender if you stop making payments. Mortgage life insurance is optional and can pay off your remaining mortgage if you die. Some people call this having a mortgage with life insurance. These are different products with different costs and rules, so mixing them up can cause real problems: you might budget for the wrong costs, underestimate what you need at closing, or assume your family is protected when it is not.
Closing Costs Can Include More Than the Down Payment
Aside from the default insurance premium added to your mortgage, you can still have significant cash costs at closing, including land transfer tax or property transfer tax (where applicable), legal fees, adjustments, and moving expenses. In Ontario, Quebec, and Saskatchewan, sales tax on the insurance premium must also be paid upfront at closing. Getting a clear “cash to close” breakdown early helps you avoid last-minute surprises.
Rolling the Premium into the Mortgage Raises the Total Cost
If you add the mortgage default insurance premium to your mortgage instead of paying it upfront, your mortgage balance goes up. Because you’re borrowing more, you also pay interest on that premium over time, so the total cost ends up higher than the premium amount by itself.
The Lowest Rate Is Not Always the Best Deal
A lower rate can come with trade-offs like stricter prepayment rules or higher penalties if you break the mortgage early. Compare flexibility, portability, prepayment privileges, and how break penalties are calculated so you do not lose savings later.
Refinancing Can Change Fees, Penalties, and Your Options
Refinancing for renovations, debt consolidation, or a new rate can come with costs that are easy to overlook. Before you refinance, confirm the penalty on your current mortgage, the lender fees, and how the new terms fit your longer-term plan.
Lender-Provided Coverage is Worth Comparing
Mortgages with life insurance and mortgage payment protection are often described as mortgage protection insurance, and while they can be convenient, the fine print matters. If you don’t compare options, you may pay more than you need to, end up with limits or exclusions that don’t fit your situation, or assume a claim will pay out when it might not, leaving you responsible for the mortgage at the worst possible time.
Last-Minute Money Moves Can Delay Approval
Pre-approval is not the final step, and lenders often re-check your file before funding. New debt, higher credit card balances, missed payments, job changes, or unexplained deposits can cause delays or trigger a re-approval, so it helps to keep things steady and document down payment funds early.
Monthly Ownership Costs Add Up Quickly
The mortgage payment is only part of the budget. Property taxes, utilities, home insurance, maintenance, and condo fees can add up fast, and condo owners also need to plan for the possibility of special assessments. A realistic monthly budget keeps the home affordable after you move in.
How Much is Mortgage Insurance in Canada?
Mortgage default insurance is typically a one-time cost that applies when you buy with less than 20% down. Most buyers add the premium to their mortgage at closing, so it’s financed over time, and you pay interest on it as part of your regular mortgage payments. The premium is based mainly on your loan-to-value (LTV) ratio, which compares how much you’re borrowing to the home’s value.
If you’re wondering “how much is mortgage insurance,” a simple way to estimate it is to apply the typical premium rate to your mortgage amount based on your down payment. The closer you are to 5% down, the more you can expect to pay, and as you move closer to 20% down, the premium usually drops or goes away.
Typical Premium Rate Ranges (Owner-Occupied Purchases)
Premiums are usually a percentage of your mortgage amount and commonly fall into these ranges (rates can be higher in some cases, such as with non-traditional down payments):
- 5% down (95% LTV): about 4.0% of the mortgage
- 10% down (90% LTV): about 3.1% of the mortgage
- 15% down (85% LTV): about 2.8% of the mortgage
- 20% down (80% LTV): default insurance is usually not required
What It Looks Like in Real Numbers
This example shows the premium and the new mortgage balance if the premium is added to the mortgage:
$600,000 home with 5% down
- Down payment: $30,000
- Mortgage: $570,000
- Premium rate: ~4.0%
- Premium: $22,800
- Mortgage if added: $592,800
Two Costs People Miss
Provincial sales tax may apply in some provinces. Where it applies, it is typically paid at closing and is not usually added to the mortgage, so it can increase the cash you need upfront. Some mortgage setups can increase the premium. For example, certain longer amortizations or special down payment situations can come with a higher premium than the standard rates.
A Simple Rule of Thumb
If you are putting 5% to 15% down, a quick planning range is that mortgage default insurance often adds roughly 3% to 4% of your mortgage amount (before any applicable provincial tax). This is separate from optional add-ons like mortgage protection insurance or choosing a mortgage with life insurance, which can change your monthly budget for very different reasons.
Understanding mortgage insurance can take a lot of guesswork out of buying a home in Canada. A REMAX agent can help you review your options, plan for the true costs, and narrow in on homes that fit your budget and goals.
