Mortgage insurance plays a crucial role in the Canadian housing market, allowing homebuyers with smaller down payments to qualify for a mortgage while protecting lenders from potential default. But how are mortgage insurance rates calculated?
Whether you’re a first-time homebuyer or looking to understand the costs associated with mortgage default insurance, this article breaks down the factors that influence rates and what you can expect when applying for a mortgage in Canada.
What Is Mortgage Default Insurance?
Mortgage default insurance, commonly referred to as CMHC insurance (though also offered by private insurers like Sagen and Canada Guaranty), is required for homebuyers who put down less than 20% of a home’s purchase price. This insurance protects the lender—not the borrower—in case the borrower defaults on their mortgage.
While mortgage insurance adds to the overall cost of purchasing a home, it allows buyers to enter the market with a smaller down payment and access lower interest rates.
How Are Mortgage Insurance Rates Calculated?
Mortgage insurance premiums are calculated based on the loan-to-value (LTV) ratio, which is the percentage of the home’s purchase price that is being financed through the mortgage. The higher the LTV ratio, the higher the mortgage insurance premium.
Here’s a breakdown of standard CMHC mortgage insurance rates:
| Loan-to-Value (LTV) Ratio | Mortgage Insurance Premium (% of Loan Amount) |
|---|---|
| Up to 65% | 0.60% |
| 65.01% – 75% | 1.70% |
| 75.01% – 80% | 2.40% |
| 80.01% – 85% | 2.80% |
| 85.01% – 90% | 3.10% |
| 90.01% – 95% | 4.00% |
For example, if you purchase a home for $500,000 with a 10% down payment ($50,000), your mortgage amount would be $450,000. At an LTV of 90%, the insurance premium would be 3.10% of the mortgage amount, or $13,950, which is typically added to your mortgage balance.
Factors That Influence Mortgage Insurance Rates
Several key factors impact the cost of mortgage insurance in Canada:
1. Loan-to-Value Ratio (LTV)
The higher your LTV (i.e., the smaller your down payment), the higher your mortgage insurance rate. This is because lenders take on more risk when a borrower has less equity in the property.
2. Purchase Price
Homes priced over $1 million do not qualify for mortgage insurance in Canada. Buyers must put down at least 20% if purchasing a home above this threshold.
3. Amortization Period
Mortgage insurance is typically only available for amortization periods of 25 years or less. If you choose a longer amortization, you will need at least a 20% down payment to avoid insurance costs.
4. Lender and Insurer Requirements
While CMHC, Sagen, and Canada Guaranty all follow similar premium structures, certain lenders may have specific guidelines that affect mortgage approval and insurance costs.
How to Reduce Mortgage Insurance Costs
If you want to lower or avoid mortgage insurance fees, here are some strategies:
✅ Increase Your Down Payment – Putting down at least 20% eliminates the need for mortgage default insurance. Even increasing from 5% to 10% can reduce the premium.
✅ Choose a More Affordable Home – A lower home price means a lower mortgage amount, which reduces both your loan-to-value ratio and insurance costs.
✅ Compare Lenders and Insurers – While CMHC is the most well-known provider, other insurers like Sagen and Canada Guaranty may offer different terms that suit your situation.
✅ Consider Alternative Financing – Some buyers explore alternative lenders that do not require mortgage insurance, but these often come with higher interest rates.
Do You Have to Pay Mortgage Insurance Upfront?
Mortgage insurance premiums are typically added to your mortgage balance rather than being paid upfront in cash. This means the cost is spread out over the life of your mortgage, increasing your overall loan amount slightly but not requiring an immediate lump-sum payment.
Final Thoughts
Mortgage insurance enables many Canadians to enter the housing market with a lower down payment, but it comes at an additional cost. Understanding how rates are calculated can help you plan your budget and explore ways to reduce your mortgage insurance expenses.
Want to explore your mortgage options? Contact The Local Broker for expert advice on securing the best mortgage solutions for your needs.
