Is it mandatory?

Mortgage loan insurance, also known as mortgage default insurance, is mandatory in Canada if you have a high-ratio mortgage.  In other words, if the down payment on your mortgage is between 5% and 19.99% you will require mortgage loan insurance.  If your down payment is at least 20% mortgage loan insurance is generally not required.  However there are exceptions, therefore you should always check with your mortgage lender. 

What is mortgage loan insurance?

Mortgage loan insurance protects the lender (the bank or financial institution) against mortgage default (if you don’t make your mortgage payments), and allows the consumer (you; the person buying the home) to make a minimum down payment while maintaining reasonable interest rates.  Your lender must pay an insurance premium to obtain mortgage loan insurance, and usually passes this cost on to the purchaser (you).  The additional cost can be paid in a lump sum or it can be added to your mortgage payments.

How is it calculated?

The premium is based on a percentage of the home’s purchase price that is financed by a mortgage, and typically ranges from 0.5% to 3% of the borrowed amount.

The primary factors influencing your mortgage loan insurance premium are the down payment and amortization period.  See the formula below and chart:

A: Mortgage amount                                       B: Insurance premium percentage

A= Home purchase price – amount saved for down payment

CHMC Insurance premium rates:

Down payment                 (% of purchase price) Insurance premium rate
≥ 35%34.99% – 25%24.99% – 20%19.99% – 15%

14.99% – 10%

9.99% – 5%

0.5%0.65%1.00%1.75%

2.00%

2.75%

 **Add 0.20% for every 5 years of amortization over a 25-year amortization period**

Mortgage insurance premium = A * Insurance premium rate

Example

Marc has purchased a home for $100 000 and has saved up $10 000 for the down payment.  His amortization period is 30 years.  What will Marc’s mortgage loan insurance premium amount to?

A: Mortgage amount                                       B: Insurance premium percentage

A= Home purchase price – amount saved for down payment

= $100 000 – $10 000

= $90 000

B= down payment – A

= $10 000 / $100 000

= 0.1 (10%)

**check the chart above for the correlating insurance premium rate**

Mortgage insurance premium = A * Insurance premium rate

= $90 000 * %2.00

= $90 000 * 0.020

= $1 800

Marc will therefore have to pay a mortgage loan insurance premium of $1,800.

There are other potential variables which one must consider when calculating mortgage loan insurance premiums.

  •  employment status (self-employed)
  • 3rd party income validation
  • energy efficient housing (CMHC rebate)
  • increasing loan for portability or refinancing

Mortgage insurance premium = A * Insurance premium rate

Example

Marc has purchased a home for $100 000 and has saved up $10 000 for the down payment.  His amortization period is 30 years.  What will Marc’s mortgage loan insurance premium amount to?

A: Mortgage amount                                       B: Insurance premium percentage

A= Home purchase price – amount saved for down payment

= $100 000 – $10 000

= $90 000

B= down payment – A

= $10 000 / $100 000

= 0.1 (10%)

**check the chart above for the correlating insurance premium rate**

Mortgage insurance premium = A * Insurance premium rate

= $90 000 * %2.00

= $90 000 * 0.020

= $1 800

Marc will therefore have to pay a mortgage loan insurance premium of $1 800.

There are other potential variables which one must consider when calculating mortgage loan insurance premiums.

-employment status (self-employed)

-3rd party income validation

-energy efficient housing (CMHC rebate)

-increasing loan for portability or refinancing

Tips

  • Opting out of mortgage loan insurance may save you an initial premium, but you will usually pay higher interest rates and additional administrative fees.  The savings you obtain as a result of acquiring mortgage loan insurance often offset the cost.
  • You can minimize your mortgage loan insurance premium by increasing your down payment and decreasing your amortization period.
  • Make sure that you do not confuse mortgage loan insurance with other types of insurance associated with home ownership such as homeowner/property insurance and mortgage life insurance.
  • **Add 0.20% for every 5 years of amortization over a 25-year amortization period**