For many Ontarians, the journey to homeownership is one of excitement and aspiration. It’s a significant milestone that represents stability, community, and a long-term investment in your future. However, navigating the financial landscape of real estate can be complex, with various terms and costs that aren’t always straightforward. One of the most significant and often misunderstood of these is mortgage default insurance, commonly referred to by the name of its most well-known provider, CMHC.
If you’re planning to buy a home in Ontario with a down payment of less than 20%, this insurance is not optional—it’s a legal requirement. Understanding what it is, how it works, and what it costs is a critical step in budgeting for your home and ensuring you’re making a well-informed financial decision.
What is Mortgage Default Insurance?
At its core, mortgage default insurance is an insurance policy that protects the mortgage lender—the bank or credit union—from losses if the borrower fails to make their mortgage payments and defaults on the loan.
It’s a common misconception that this insurance protects the homebuyer. In reality, the homebuyer pays the premium, but the lender is the beneficiary. So, why is it required? It comes down to risk. A down payment in Ontario of less than 20% is considered a “high-ratio” mortgage, meaning the loan-to-value (LTV) ratio is high. This higher ratio presents a greater risk to the lender. By insuring the mortgage, the lender’s risk is significantly reduced. This government-backed protection gives lenders the confidence to approve mortgages for individuals who haven’t yet saved up a 20% down payment, thereby making homeownership accessible to a much broader range of Canadians.
The Key Players: CMHC, Sagen, and Canada Guaranty
The term “CMHC insurance” has become a generic trademark, much like Kleenex for tissues. While the Canada Mortgage and Housing Corporation (CMHC) is a federal Crown corporation and the original provider, there are two other private companies in Canada that offer the same product: Sagen (formerly Genworth Canada) and Canada Guaranty.
From a homebuyer’s perspective, the products offered by all three are virtually identical. They follow the same rules and premium structures. You, the borrower, do not get to choose your provider; your lender will submit your application to one of the three insurers. The important takeaway is that no matter who underwrites the policy, the function and cost to you remain the same.
When is Mortgage Default Insurance Required?
The rule is simple and absolute: mortgage default insurance is mandatory in Canada for all homes purchased with a down payment of less than 20% of the purchase price.
There are, however, a few key constraints on eligibility:
- Purchase Price Limit: The property’s purchase price must be less than $1,000,000. Homes priced at $1 million or more are not eligible for mortgage default insurance and therefore legally require a minimum down payment of 20%.
- Amortization Period: The insurance typically covers mortgages with an amortization period of 25 years or less. If you opt for a longer amortization (where available on a conventional mortgage), you would not be eligible for this type of insurance.
- Creditworthiness: You must still meet the lender’s criteria for creditworthiness. This includes having a good credit score and successfully passing the federal mortgage stress test.
How Premiums are Calculated and Paid
The cost of your mortgage default insurance premium is calculated as a percentage of your total mortgage loan amount. This percentage is not fixed; it’s based on a sliding scale determined by your down payment. The smaller your down payment, the higher the percentage, and therefore, the higher the premium.
Here is a typical premium structure:
- Down Payment of 5% up to 9.99%: 4.00% Premium
- Down Payment of 10% up to 14.99%: 3.10% Premium
- Down Payment of 15% up to 19.99%: 2.80% Premium
Let’s use a practical example:
Suppose you want to buy a home in Hamilton for $700,000 with a 5% down payment.
- Purchase Price: $700,000
- Down Payment (5%): $35,000
- Mortgage Amount: $665,000
- Applicable Premium Rate: 4.00%
- Insurance Premium Cost: $665,000 x 0.04 = $26,600
This $26,600 premium is most commonly added to your mortgage principal, bringing your total loan to $691,600. This means you will pay interest on the insurance premium over the full amortization of your loan.
The Hidden Cost: Provincial Sales Tax (PST)
Here is a crucial detail for Ontario buyers: while the insurance premium itself can be rolled into the mortgage, the Provincial Sales Tax (PST) on that premium cannot. In Ontario, an 8% PST is charged on the total premium amount, and this tax must be paid in cash as part of your closing costs.
Using our example above:
- Insurance Premium: $26,600
- Ontario PST (8%): $26,600 x 0.08 = $2,128
This $2,128 would be due to your lawyer on closing day, in addition to your down payment and other closing costs like land transfer tax and legal fees. It is a detail that can catch first-time buyers by surprise if they haven’t budgeted for it.
The Pros and Cons of Mortgage Default Insurance
The Primary Advantage: Accessibility
The single greatest benefit of mortgage default insurance is that it opens the door to homeownership for thousands of people who might otherwise wait years to save a 20% down payment. In a market where property values can rise quickly, waiting to save can sometimes feel like chasing a moving target. This insurance bridges the gap, allowing you to begin building equity in a home sooner.
The Primary Disadvantage: Cost
The downside is purely financial. It is a significant added cost. By adding the premium to your mortgage, you increase your monthly payments and the total amount of interest you’ll pay over the life of the loan. In our $700,000 home example, the buyer is paying interest on an extra $26,600 for up to 25 years.
Mortgage default insurance is a fundamental component of the Canadian housing market. While it represents an additional cost, it’s also a vital tool that provides liquidity to the market and makes the dream of homeownership a reality for many Ontarians. By understanding that it protects the lender, when it’s required, and how both the premium and its associated tax are calculated, you can approach your home purchase with a clear and complete financial picture. It’s not just another fee; it’s the cost of entry into the market for those with less than 20% down, and knowing its true price is the first step toward a sound investment.
