Mortgage Insurance in Canada: What Homebuyers Need to Know

When buying a home in Canada, understanding mortgage insurance is essential. This insurance isn't just a formality; it protects lenders if you default on your loan. With premiums varying based on your loan-to-value ratio, knowing the specifics can impact your financial planning. So, what are the requirements, and is it always mandatory? Let's explore the key aspects of mortgage insurance that buyers should know before making this financial commitment.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

5 Things to Know About Mortgage Insurance

• Mortgage insurance protects lenders if homeowners default on payments and is mandatory for down payments of less than 20%.
• Premiums range from 0.60% to 4.5%, depending on the loan-to-value ratio and down payment source.
• The minimum down payment to avoid mortgage insurance is 5% for homes up to $500,000 and is higher for more expensive homes.
• Homebuyers must have a minimum credit score of 600 to qualify for an insured mortgage.
• Mortgage insurance is not available for homes valued at $1 million or more.

What Is Mortgage Insurance?

Mortgage insurance protects lenders if homeowners default on their mortgage payments. It allows homeownership with a minimum down payment of 5%, making it more accessible. However, the insurance cost, known as the premium, is passed on to the borrower. These rates range from 0.60% to 4.5%, depending on the loan-to-value ratio and the source of down payment funds, with higher rates for lower down payments.

This insurance requires a credit score of at least 600, along with meeting specific debt service ratios. While it enables buyers to secure a mortgage with a smaller down payment, it also increases the overall cost of the mortgage over time. Understanding these factors is crucial for making informed home financing decisions.

Is Mortgage Insurance Required?

In Canada, mortgage loan insurance is typically required for home purchases with a down payment of less than 20%. However, this insurance isn't available for homes valued at $1 million or more, regardless of the down payment. The minimum down payment in Canada is 5% for homes priced at $500,000 or less. For homes priced above $500,000, you'll need 5% for the first $500,000 and 10% for the remaining amount. 

While mortgage loan insurance is essential for lower down payments, mortgage protection insurance, which covers payments in case of job loss, illness, and other unforeseen events, is optional and not required for mortgage approval.

How Much Is Mortgage Insurance?

The cost of mortgage insurance premiums in Canada depends heavily on your loan-to-value ratio. Premium rates start at 0.60% for a loan-to-value ratio up to 65% and increase to 4.00% for ratios up to 95%, i.e. the minimum 5% down payment. As discussed above, minimum down payment requirements vary depending on the price of the home.

The CMHC premium table is as follows:

*Mortgage default insurance typically required. Some lenders may require mortgage insurance even with a 20%-plus down payment, usually when seeking a mortgage when self-employed or with poor credit.

**Premium can rise to 4.5% if using non-traditional sources of down payment. These include gifts, borrowed funds, lender’s cash back incentives, and more. Check with your lender if you’re unsure whether your down payment source qualifies as traditional or non-traditional.

You can pay the premiums upfront or include them in your monthly mortgage payments. Additionally, provincial sales tax may apply in Quebec, Ontario, and Saskatchewan, further increasing your total cost. This tax should be considered in your budgeting to accurately plan for your mortgage expenses.

How to Qualify For Mortgage Insurance

To secure mortgage insurance in Canada, you must meet specific eligibility criteria that ensure you're a reliable borrower. A minimum credit score of 600 is required, typically set by providers like CMHC and Sagen, to demonstrate responsible debt management. You must have an acceptable down payment source, such as savings or family gifts. The down payment must be at least 5% for homes priced at $500,000 or less and 10% for any amount exceeding that.

Homeowners also must meet specific Gross Debt Service (GDS) and Total Debt Service (TDS) ratio requirements, with GDS capped at 35% and TDS at 42%. This ensures you can manage your mortgage alongside other debts. GDS measures housing costs versus the borrower’s total gross income, what you earn before taxes and other deductions. TDS measures all debts, including both the new mortgage and debts such as credit cards, auto loans, etc., against the borrower’s gross income.

In sum:

• 600+ credit score
• Acceptable down payment source
• ≥5% down payment on homes $500,000 or less
• ≥10% down payment on any amount after the first $500,000
• Gross Debt Service ratio ≤35%
• Total Debt Service ratio ≤42%

Mortgage loan insurance is mandatory for down payments under 20% but isn't available for luxury homes for sale valued at $1 million or more.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Mortgage Insurance: What to Keep In Mind

Mortgage insurance plays a crucial role in assisting homebuyers with smaller down payments. While it adds to the overall cost of your mortgage, understanding the eligibility requirements, premium rates, and how it affects your budget can help you make informed decisions. By meeting the necessary criteria and planning accordingly, you can navigate the mortgage process more confidently and secure the home that meets your needs.

Frequently Asked Questions

What Are the 3 Mortgage Insurers in Canada?

The three main mortgage insurers in Canada are CMHC, Sagen, and Canada Guaranty. Each protects lenders against borrower default and has unique qualification criteria. CMHC is the most recognized as a crown corporation.

What Does Mortgage Insurance Cover in Canada?

Mortgage insurance in Canada covers lenders if you default on your mortgage payments. It doesn't cover your payments, so there are separate insurance products to safeguard against mortgage default due to job loss, illness, or death.

Does Mortgage Insurance Actually Pay Out?

Standard mortgage insurance doesn't pay out to you as a borrower. It protects the lender if you default on your mortgage. If you're looking for coverage that benefits your family, consider mortgage life insurance instead.

When Can I Get Rid of Mortgage Insurance in Canada?

You can usually get rid of mortgage insurance in Canada once your equity reaches 20%. Request an appraisal to confirm your home's value, then contact your lender to discuss removing the insurance. Check your mortgage agreement for specific policies.