What is Mortgage Loan Inusurance and Why You Need It

Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price of a home. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.

If you want to buy a house using a down payment of less than 20% of the purchase price, you are required to pay for mortgage loan insurance (officially referred to as mortgage default insurance). You are essentially buying it on behalf of the lender because if you default on your mortgage, the insurer will reimburse the lender for your loan and most associated costs. The amount you are charged increases as your down payment decreases and your cost generally ranges from 1% to 4% of your purchase price. You are allowed to add the fee to your mortgage but you have to pay the associated PST upfront, as part of your closing costs.

CMHC has programs for self-employed applicants, new immigrants and a whole host of other groups. Your mortgage loan insurance is fully transferable to a different lender if you find a better deal at renewal. If you want to increase your original loan amount at some point in the future, you only have to pay an insurance fee on the additional amount borrowed.

Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.

The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000.

The CMHC program is run by the Government of Canada. Having a centralized policy for high-ratio underwriting risk has given the government a reasonable amount of control over our residential market. Given the US example of what happens when lending runs without control, maybe that’s not entirely a bad thing. Especially when you consider that since CMHC started assuming the risk for high-ratio mortgages, it has opened up home ownership to a wide range of middle-class Canadians and was an important catalyst for the democratization of Canadian credit. Since that time (1954), our home ownership levels have been rising steadily and are now among the highest in the world.

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