What is Mortgage Default Insurance?
Mortgage default insurance is provided to protect the lender in the case that you are unable to make payments on your mortgage. It is additional protection that is required on high-ratio mortgages where the buyer has less than 20% in down payment or equity. This will provide the lender with protection in the case that you default on your mortgage. Mortgage default insurance also provides a benefit to the purchaser allowing them to purchase a home with a down payment as low as 5% while still obtaining favourable rates. This will allow for a home to be purchased sooner so the purchaser can being building equity sooner.
CMHC default insurance premiums
Mortgage default insurance is calculated based on the loan-to-value ratio. You can calculate the loan-to-value with the following formula: Loan-to-Value = (Purchase Price - Downpayment) / Purchase Price. A higher loan-to-value percentage will result in a higher overall premium.
| Loan-to-Value | Premium on Total Loan |
|---|---|
| More than 0% up to 65% | 0.60% |
| More than 65% up to 75% | 1.70% |
| More than 75% up to 80% | 2.40% |
| More than 80% up to 85% | 2.80% |
| More than 85% up to 90% | 3.10% |
| More than 90% up to 95% | 4.00% |
Mortgage default insurance premium calculation example: Let's calculate the mortgage default insurance premium on a home in Ontario with a purchase price of $750,000 and a minimum downpayment of $50,000 applied. First we need to calculate the loan-to-value ratio.
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Loan-to-Value Ratio
= ($750,000 Purchase Price - $50,000 Down Payment ) / $750,000 Purchase Price
= 93.33% LTV
Since the Loan-to-value ratio is 93.33% which falls in the more than 90% up to 95% category, the rate used to calculate the total premium is 4%. We can use this rate to calculate the total premium.
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Total Premium
= ($750,000 Purchase Price - $50,000 Down Payment ) * 4.00% Premium Rate
= $28,000 Total Premium
The total mortgage default insurance premium is $28,000 on a home with a purchase price of $750,000 and a down payment of $50,000. This mortgage default insurance premium can either be paid upfront or added onto the cost of the mortgage. Since this example home was purchased in Ontario there will also be PST that will need to be calculated.
Provincial sales tax on default insurance premiums
Mortgage default insurance premiums are also subject to provincial sales tax (PST) based on the province where the home is purchased. PST will be applied on the value of the mortgage default insurance premium If you are purchasing a home in Ontario, Quebec or Saskatchewan.
| Province | PST rate |
|---|---|
| Ontario | 8% |
| Quebec | 9% |
| Saskatchewan | 6% |
Mortgage default insurance PST calculation example: Let's calculate the PST on the mortgage premium from the above example where the home was purchased in Ontario and the total premium is $28,000.
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PST on mortgage default insurance premium
= $28,000 Deafult Insurance Premium * 8% Ontario PST rate
= $2,240 PST
The total PST on a mortgage default insurance premium of $28,000 in Ontario is $2,240. While the cost of the mortgage default insurance Premium can be added to the mortgage. The PST on the premium needs to be paid upfront upon closing.
Canada minimum down payment chart
While mortgage default insurance can be provided on mortgages with less than 20% downpayment, you will still be required to make the minimum downpayment. The minimum downpayment required changes based on the value of the home being purchased. Below is a breakdown of the different rates charged at various home prices.
| Purchase Price | Minimum Down Payment Required |
|---|---|
| Less than $500,000 | 5% of purchase price |
| $500,000 to $999,999 | 5% of the purchase price for the first $500,000; 10% for the portion above $500,000 |
| $1 million or more | 20% of the purchase price |