Things to Know About: Mortgage Default Insurance

When do you need mortgage default insurance?

Mortgage default insurance is required by the Government of Canada for mortgages if the amount of a loan is greater than 80% of the purchase price (or appraisal value) of a residential property. This means that Coast Capital can only provide mortgage financing to homeowners with down payments less than 20% if the mortgage is insured by mortgage default insurance.

How much down payment is required with mortgage default insurance?

Mortgage default insurance allows homeowners to purchase a residential property with as little as a 5% down payment for properties with a purchase price up to $500,000. For properties valued above $500,000, the homeowner must put 5% down for the first $500,000 and 10% down for any amount greater than $500,000.

Properties worth over $1,000,000 and mortgages with amortization periods greater than 25 years cannot qualify for mortgage default insurance at all.

Example of down payment calculation: 

For a property valued at $600,000 the homeowner would be required to provide a minimum down payment of $35,000 (5% on the first $500,000 plus 10% on the additional $100,000).

Who does mortgage default insurance protect?

Mortgage default insurance protects the mortgage lender (i.e. the bank or credit union) if a homeowner defaults on their mortgage and the lender is unable to recover the full amount that is owed, including unpaid interest and legal fees. In the event that the mortgage insurer pays the lender for a shortfall caused by a homeowner’s default, the mortgage insurer may take legal action against the homeowner to collect such shortfall, if permitted under applicable law.

Defaulting on a mortgage is usually caused by the homeowner failing to make payments but may be caused by other ways, which will be outlined in the mortgage agreement.

It is also important to remember that mortgage default insurance does not protect the homeowner and should not be confused with life or disability insurance, which are for the protection of the homeowner. 

Who provides mortgage default insurance?

In Canada, mortgage default insurance is provided by Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. Coast Capital decides which mortgage insurer to use; however, the mortgage insurer decides whether to insure a particular mortgage. If the mortgage insurer declines to provide mortgage default insurance, Coast Capital cannot provide the mortgage loan unless one of the other mortgage insurers is prepared to insure the mortgage or the homeowner is able to provide a 20% down payment. 

Who pays the premium for mortgage default insurance?

The amount of the premium is paid by the homeowner to the mortgage lender, who then pays the mortgage insurer. The premium is a one-time charge that can be paid as a lump sum at the outset, or the homeowner can choose to have the amount added to the principal amount of the mortgage loan and repaid over the same amortization period outlined in the mortgage. 

Depending on the province where the property is located, a provincial sales tax may also apply.  Any applicable sales tax must be paid by the homeowner at the outset of the mortgage.   

How is the premium calculated?

To determine the amount of the premium, the mortgage insurer requires Coast Capital to provide certain details about a homeowner’s mortgage loan application and then calculates the cost of the premium as a percentage of the amount borrowed.  The percentage used in the calculation will be determined by the loan-to-value ratio of the mortgage, which is calculated by dividing the loan amount by the property value. Larger down payments produce lower loan-to-value ratios, which in turn result in lower premium costs. Factors such as the source of the down payment may also affect the premium calculation.

Additional details about mortgage default insurance and how the premium is calculated can be found on the mortgage insurer websites:

CMHC: www.cmhc-schl.gc.ca/en/co/moloin/index.cfm

Sagen: www.sagen.ca/

Canada Guaranty: www.canadaguaranty.ca

Example of premium cost calculation¹:

1 This example was prepared based on CMHC standard premiums charged for 90% and 95% loan-to-value ratios as of October 1, 2017, and is for illustrative purposes only. Current premium rates can be found on the mortgage insurer websites, including CMHC’s website at https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm.