Buying a home is one of the most important financial decisions that you’ll make in your lifetime and requires a lot of consideration. When you’re ready to buy a home, mortgage insurance is a topic that will come up depending on how much you have saved up for a down payment.

As a general rule, the less money you put down on a home, the more risk the bank is taking on. This type of insurance helps people secure a loan for the home they want right away.

In this article, we’ll break down everything you need to know about mortgage insurance in Canada. Thanks to Canada’s strong housing market, right now is a great time to invest in your future and build equity.

WHAT IS MORTGAGE INSURANCE?

The Canada Mortgage and Housing Corporation (CMHC) mortgage loan insurance is required by lenders when homebuyers make a down payment of less than 20% of the purchase price. It protects your lender if there ever comes a time when you can’t make your monthly mortgage payment but also allows homebuyers to purchase a home with a minimum down payment starting at 5%.

Basically, the lender takes out the insurance and then passes that cost onto you. You can’t shop around for it, and you don’t have a say in the premium cost or the terms.

As home prices continue to increase, it is becoming more difficult than ever before to save up for a down payment on a new home. Aside from protecting lenders, mortgage insurance also opens the door for more people to be able to purchase a home with a smaller down payment. 

It’s important to note that mortgage insurance is not the same as mortgage life insurance. Mortgage life insurance pays the remaining balance of your mortgage if you die, so your family will have a mortgage-free home in which to live (something you should carefully consider if you have a family). A mortgage or insurance professional will be able to tell you more about this coverage and how much it costs.

HOW MUCH DOES IT COST?

The mortgage insurance premium cost ranges between 0.6 and 4 percent of the purchase price of the home depending on the loan-to-value ratio. You can choose to pay the premium in one lump sum payment or have it added to your total mortgage amount. Most homebuyers opt for the second option because the increase in your monthly mortgage payment is usually easier to budget for, rather than a large lump sum.

Let’s do the math using a $400,000 home with a mortgage rate of 3.82% for our example:

*mortgage payment rounded to the nearest dollar

The difference in your monthly mortgage payment from 5% to 20% down is less than $400/month. So while you would have a lower payment and are able to build more equity faster this way, that is also $60,000 extra you need to save up.

If you’ve taken a look at your budget and saving up that much isn’t worth putting off your dreams of homeownership even longer, the lower down payment with mortgage insurance is your best option.

With the rapid appreciation of housing prices, now is a great time to find a home and get a mortgage. You will start building equity right away and the insurance premium you pay may be less than the price increase you’d pay on the same home if you waited until you saved for a bigger down payment.

HOW TO QUALIFY FOR CMHC MORTGAGE LOAN INSURANCE

In order to qualify for the CMHC Mortgage Loan Insurance, you must meet the following requirements.

• This may seem obvious, but since this insurance applies to mortgages in Canada,  the home you want to buy has to be located within its borders.
• Next, the value of the home must be less than $1 million when the Loan-to-Value (LTV) ratio is more than 80%. This ratio expresses the lending risk by the lender. Higher LTV ratios are higher risk. This risk is what puts you in the position of either buying mortgage loan insurance or paying higher interest for your home loan.
• Your down payment will need to be at least 5% of the cost of single-family and duplex homes. If the property has either three or four units, the minimum down payment is 10%.
• Usually, you are the one who will have to pay the down payment from your own resources. There are special rules for gifts from family.
• The PITH (Principal, Interest, Taxes and Heating), annual site lease and half condo fees should not be more than 32 percent of your gross income (money you make before taxes are taken out). This is called the Gross Debt Service (GDS) ratio. Before looking for a house to buy, use this formula to find out how much house you can afford.
• The payments on all your debts plus the TDS should not be more than 40% of your gross income.

Don’t forget that you will have to pay closing costs that can range anywhere from 1.5 – 4% of the price of the home. You will need to write a check for these items at your closing. The real estate agent or home builder you work with will be able to tell you exactly how much you need to pay for these costs.

EXPLORE YOUR MORTGAGE OPTIONS

When buying a home, one of the biggest obstacles to get through is getting approval on a mortgage. Some lenders want their borrowers to have an extensive credit history. As a general rule, the higher your credit score, the more options that you have to work with on your mortgage. 

While it’s true your monthly mortgage payment is going to be higher if you save a minimum of 5% down and require mortgage insurance if you have good credit and stable income you’ll have a high chance of qualifying for the mortgage you want.

As you saw in the example above, if you want to save a higher down payment and avoid mortgage insurance, you will have a lower monthly payment. Alternatively, you could use the initial savings to offset the price of a larger home. Now is the time for you to start saving up in order to make a considerable down payment on your future home.

SO WHAT DOES THIS MEAN?

In short, CMHC Mortgage Loan Insurance is a program designed to help buyers realize their dreams of homeownership, as well as protect the lenders that are lending money to risky borrowers. If you are building a home, make sure to ask your builder about different financing options for your home. Builders will have a lot of experience when it comes to finding a quality loan for their clients.

Buying a home is exciting, but it can also bring up some uncertainty. The experience will be smoother and more enjoyable if you do your research in advance so there are no unpleasant surprises. 

Know what size mortgage you qualify for, how much money you will need upfront, and what your monthly costs will be. Research various lenders or talk to a mortgage broker to find one that you can live with happily for decades. Then, it’s time for the fun part – finding your dream home and moving in!

Originally posted Sept 28, 2017; updated Jan 10, 2023

Author: Jeff S.

Proud father and husband. Loves music, Nine Inch Nails, UFC and inbound marketing.