What Is Mortgage Default Insurance?

If you miss a mortgage payment, your mortgage will become delinquent, which means that you are behind on your payments. If you continue to miss payments and do not catch up on your delinquent balance, your mortgage will go into default.

Most lenders will give you a 15-day grace period before your payment is considered missed, but after 30 days the missed payment will typically be reported to the credit bureaus.

This is a serious situation with big consequences, including late fees, damage to your credit score and even the loss of your home to foreclosure.

When you purchase a home, you’re required to make a down payment. The down payment is deducted from the purchase price and the balance is covered by your mortgage. The down payment requirement is based on the home’s purchase price.

The minimum required down payment for an owner-occupied home is as follows:

By law, if your down payment is less than 20% on any purchase price, you will need to get mortgage default insurance, also known as mortgage loan insurance or a high-ratio insured mortgage. Your lender may also require mortgage default insurance if your property is in a remote location or if you’re considered higher risk based on other factors. Homes with a purchase price of over $1 million are not eligible for mortgage default insurance.

An insured mortgage provides extra assurance to your lender that you will be able to make your mortgage payments and not default on your loan. Your lender pays a mortgage default insurance premium on your loan that is calculated as a percentage of the mortgage. If you default, this premium covers the cost of legal proceedings and any shortfall relative to the mortgage once the property has been sold. This premium is passed on to you.

There are three mortgage default insurance providers in Canada: CMHC, Sagen (formerly Genworth Financial Canada) and Canada Guaranty.

The most common mortgage insurance provider is CMHC, a federal Crown Corporation. Sagen and Canada Guaranty are private lenders. Each evaluates borrowers and properties differently. You don’t select your mortgage default insurer. Instead, your lender will arrange for mortgage default insurance on your behalf.

The cost of mortgage default insurance is calculated as a percentage of the principal of the loan. Specifically, the percentage is based on the loan-to-value ratio of your mortgage, which is the principal amount divided by the purchase price. A larger down payment will result in a lower loan-to-value ratio.

For example, if you want to purchase a home for $495,000 with a 5% down payment of $24,750, your mortgage would be for $470,250. Your loan-to-value ratio would then be 95%.

While the premium charged may differ between lenders, here is an example of premiums charged by the CMHC:

The premium can be paid as a lump sum or added to your mortgage and included in your monthly payment.

Using the example of the home purchased for $495,000 with 5% down, your purchase premium would be 4%. That means your mortgage default insurance premium would be $18,810 ($470,250 x 4%) that would be added to your overall loan amount.

However, if you make a 15% down payment, or $74,250, your loan-to-value ratio would be 75% and your purchase premium would be 1.7%. Your mortgage default insurance premium would then be $7,152.58 ($420,740 x 1.7%)

Each mortgage default insurance lender will have their own metrics for evaluating borrower risk, however these requirements apply across the board:

• The mortgage amortization period must be 25 years or less.
• The purchase price of your home is less than $1 million.
• The property must be located in Canada.
• You can not get mortgage default insurance for an investment property, so you’ll need to make a minimum 20% down payment.

In addition, to qualify for insurance with CMHC, you must meet the following criteria:

• Your total debt service (TDS) ratio (total debt obligation versus your household income) should be less than 44%.
• Your gross debt service (GDS) ratio (total housing costs versus your household income) should be less than 39%.
• Your credit score should be 600 or above.
• Your down payment does not come from borrowed sources.
• If the property is a single unit, it must be owner occupied.

As mentioned, mortgage default insurance is there to protect the lender and not the borrower from mortgage defaults. So how can you prevent defaulting on your mortgage?

First of all, if you’re worried about missing a payment, contact your lender right away. If the issue is due to a short-term cash crunch, you may be able to arrange to skip or defer a payment. If you’re facing a bigger budget issue, you may be able to refinance your mortgage or work with a credit counsellor to consolidate your other debts.

No homeowner wants to be scrambling each month to cover their mortgage, so the more proactive solution is to know how much house you can afford before you buy. Rather than getting the biggest mortgage you can afford, you can create a bit of a financial buffer by borrowing less with a larger down payment or purchasing a smaller house.