Mortgage Default Insurance and Creditor Insurance

Mortgage insurance and creditor insurance are both important parts of homeownership. While mortgage insurance protects the lender, creditor insurance protects you as the borrower. It’s important to understand the ins and outs of both so you can plan ahead and budget accordingly when preparing to buy a home.

What is mortgage default insurance?

Homeownership is a common goal for many Canadians, but there are very few folks who are able to buy their homes without a mortgage. Many will contribute a percentage of the purchase price of their home and borrow the rest. This portion paid upfront is called a down payment. Of course, the down payment only covers a fraction of the cost of buying a home. The rest of the amount is typically covered by a mortgage.

If your down payment is less than 20% of a home’s purchase price, you may require mortgage default insurance. Also known as mortgage insurance, it’s required on all mortgages with down payments of less than 20% (or high-ratio mortgages) where the value of the property is less than $1,000,000.

There are three mortgage default insurance providers in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. As a borrower, you probably won’t deal with these companies directly, as your lender will work with them to arrange financing. Typically, lenders add mortgage insurance premium to your total mortgage amount and will be added as part of your monthly mortgage payments.  You also have the option of paying this amount as a lump sum up front. The mortgage default insurance is added to your mortgage amount, so you would be paying interest on the money borrowed, plus mortgage default insurance. If you decide to pay an upfront lump sum, the mortgage default insurance amount would not be added to your mortgage amount, so you would save on interest. Learn more.

How mortgage default insurance works

Calculating the down payment

With owner-occupied homes, if the purchase price is less than $500,000, the minimum down payment will be 5% for most mortgages. If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 and 10% for any amount over $500,000. If the purchase price is $1,000,000 or more, then the minimum down payment is 20%.

For example, let’s say you purchase a home that is $800,000. So, 5% of $500,000 equals $25,000 and 10% off the remaining portion ($300,000) equals $30,000. So, your total down payment would need to be at least $55,000.

Calculating mortgage default insurance

Mortgage default insurance isn’t cheap – which is why you’ll want to save up for as large of a down payment as possible. For example, say you were buying a $500,000 home with a 5% down payment ($25,000), your mortgage default insurance premium would be $19,000. That’s calculated by multiplying the “rate” of the insurance by the amount being borrowed.

The rate is set by the mortgage default insurers and depends on how large your down payment is, relative to the price of the home. For down payments of 5%, the set rate of  insurance premium is 4%. So, we can multiply 4% by the amount being borrowed – $475,000 – to get $19,000, which would add significantly to your overall costs. Learn more about how mortgage default insurance is calculated.

Minimizing mortgage default insurance

One way to minimize mortgage default insurance is to save up for a larger down payment. The Home Buyers’ Plan (HBP) allows home buyers to borrow up to $60,000 from their RRSP for a down payment, tax-free. If you and your co-borrower each have an individual RRSP and choose to participate in the plan, you can withdraw a combined maximum of $60,000 per person for a total of $120,000. You have up to 15 years to pay what you withdraw from your RRSP back. The payment period begins the 5th year after the year when funds are withdrawn. For example, if you withdrew funds in 2025, your first year of repayment will be 2030.

What about creditor insurance?

Creditor insurance is another type of insurance you can get for your mortgage, but creditor insurance protects you – the borrower. Creditor insurance, which is optional and highly encouraged, is a smart way to help protect your family’s lifestyle. If something unexpected happens and you are unable to make your mortgage payments, creditor insurance can help protect you and your loved ones. It can also help cover mortgage debt you may have, in the event of critical illness, death, or disability.

If you decide creditor insurance is right for you, you’ll be able to apply for it during your mortgage application. You can also apply to add it to your existing mortgage at any time. Learn more about creditor insurance from the leading company in Canada, Canada Life.

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade Group of Companies, its affiliates or any other person to its accuracy.