Owning a home is exciting but can feel a bit overwhelming, especially when you’re trying to make sense of all the financial products involved. One of the big ones to understand is mortgage insurance for your mortgage —it’s a key part of the process that can really affect both your home-buying experience and your financial peace of mind.
Whether you’re buying your first home or thinking about refinancing, it’s worth getting a handle on mortgage insurance. So, what exactly is it, and how does it work? Let’s find out.
Understanding mortgage insurance
In Canada, mortgage insurance—also called creditor insurance—is a type of financial protection often offered by your mortgage lender. In simple terms, it’s designed to pay off your mortgage balance if you pass away while you still owe on your loan, providing peace of mind that your mortgage debt won’t fall on your loved ones.
What does mortgage loan insurance cover?
Mortgage loan insurance is there to pay off your mortgage balance if you pass away while still owing, so your loved ones aren’t left with the debt. It also protects lenders from mortgage defaults, making it possible for buyers to get into a home with as little as a 5% down payment—often with interest rates similar to those you’d get with a larger down payment.
Do you have to get mortgage insurance?
If your down payment is less than 20% of the home’s purchase price, mortgage insurance will likely be required. This type of insurance is there because a smaller down payment means a higher loan-to-value ratio, making lenders view these loans as higher risk. So, in cases where you’re putting down less than 20%, the lender will typically insist on this insurance to help manage that risk.
Mortgage insurance isn’t available for homes priced at $1 million or more since these properties need a minimum down payment of 20%. But starting December 15, 2024, that cap is going up to $1.5 million, meaning mortgage insurance will be an option for more buyers in higher price ranges.
Can mortgage insurance be removed in Canada?
Yes, in most cases, you can cancel your mortgage default insurance once you’ve reached 20% equity in the property—so when your loan-to-value ratio is below 80%.
Types of mortgage insurance in Canada
In Canada, there are three main types of mortgage insurance. These include:
Mortgage default insurance
In Canada, if your down payment is less than 20%, you’ll need to get mortgage default insurance, also known as mortgage loan insurance or CMHC insurance. This isn’t about protecting you—it’s actually there to protect the lender in case you can’t keep up with the mortgage payments.
For instance, let’s say you’re buying a $500,000 home with a 10% down payment. Mortgage default insurance lowers the risk for the lender, allowing you to still get the mortgage even with a smaller upfront payment.
Mortgage protection insurance (optional)
Mortgage protection insurance is an optional extra layer of security that you can choose to add for peace of mind. This type of insurance helps cover mortgage payments if something unexpected happens, like a disability, critical illness, or even death.
For instance, if the main income earner in your family faces a serious illness, optional mortgage protection insurance can step in to help cover the payments. This way, your family can stay in their home without the added financial strain.
How much does mortgage insurance cost?
You'll need to pay mortgage insurance premiums, which are calculated as a percentage of your mortgage and depend on your down payment size. The larger your down payment, the lower your premium rate. Here’s how CMHC’s rates break down:
- For down payments of 5% to 9.99%, the premium is 4%.
- For down payments of 10% to 14.99%, it’s 3.1%.
- For down payments of 15% to 19.99%, the rate is 2.8%.
So, if you’re buying a $500,000 home and put down 5% ($25,000), you’d pay a 4% premium on your $375,000 mortgage—that’s an extra $15,000. If you put down 10%, your premium would be lower at $10,850. It’s a good reminder that, whenever possible, making a larger down payment can help reduce your costs.
How much mortgage insurance do I need?
The amount of mortgage coverage you need depends on your home’s value and cost, along with a few other factors. If you go with your lender’s mortgage insurance, you don’t get much flexibility—the coverage is automatically tied to the amount and term of your mortgage loan.
What are the benefits of mortgage insurance?
There are several benefits of having mortgage protection insurance, such as:
You are more likely to qualify for a mortgage
Mortgage insurance gives lenders more confidence to approve borrowers who might not meet the usual lending standards. This can be a big help for people with lower credit scores or those who are just starting to build their credit history.
You can buy a home sooner
Mortgage insurance helps make homeownership possible for more Canadians by allowing smaller down payments. Without it, many people would need to save a lot more upfront, which could delay their chance to buy a home. This insurance gives borrowers the flexibility to buy sooner, even with a lower down payment—a huge help for first-time buyers or anyone looking to move into a larger home.
You can have access to competitive mortgage rates
Mortgage insurance—whether it’s required or optional—is all about protecting the lender. It reduces the risk of borrowers defaulting, so if a borrower can’t keep up with payments, the lender can still recover their money. This lower risk can mean lower interest rates for borrowers. This can add up to big savings over the life of the mortgage, making home ownership more affordable overall.
Are there any potential downsides to mortgage insurance?
While mortgage insurance has its advantages, there are some downsides to consider. The premiums can be high, and if they’re added to your mortgage balance, you’ll pay interest on them over time, which increases the total cost of the loan. This can also impact how quickly you build equity in your home, as those added premiums slow down your progress. In some Canadian provinces, there’s also a provincial sales tax on mortgage insurance premiums, which raises the overall cost. And while it does make it easier to buy a home sooner, paying premiums over the long term can add up significantly.
How is mortgage default insurance different from mortgage protection insurance?
Mortgage default insurance, usually offered by your lender, is a policy that pays off your mortgage if you pass away before it’s fully repaid. You pay a fixed premium, covering a decreasing mortgage balance to benefit your lender. While this insurance, sometimes referred to as a mortgage life insurance policy, protects the lender, it doesn’t cover your personal needs or provide financial flexibility. The premium cost is a percentage of your mortgage and depends on your down payment size—sometimes even on your remaining mortgage balance.
A great add-on to consider is mortgage protection insurance, which is designed to support you and your family. Unlike traditional mortgage insurance, it’s flexible and works like a term life policy. Mortgage protection can help cover the mortgage balance and other financial needs if an income earner passes away or becomes critically ill. It can also step in to cover your mortgage payments if you’re unable to work due to a disability or job loss. You can add this protection anytime through your lender or insurance provider, like when you decide to renew your mortgage, and the premium cost will depend on factors like your mortgage amount, age, and monthly payment size.
Why should I consider both mortgage default insurance and mortgage protection insurance?
Mortgage default insurance makes it possible to buy a home sooner if your down payment is less than 20%. While this type of insurance might be required, it’s also a good idea to think about protecting your biggest asset with optional mortgage protection insurance. Instead of only paying off your loan if you pass away, it also pays it off if you become critically ill, and it'll help cover payments if you're unable to work due to a disability or job loss.
Who offers mortgage insurance in Canada?
In Canada, the main provider of mortgage loan insurance is the Canada Mortgage and Housing Corporation (CMHC). However, there are also private mortgage insurance companies that offer similar insurance policies.
What happens with mortgage insurance if you sell or buy a new property?
It’s pretty common for first-time buyers to decide to move after a few years, whether it’s because their family is growing, they have a job opportunity elsewhere, or they’re ready to invest in a new property. Usually, this means taking out a new mortgage. So, what are your options?
In many cases, mortgage insurance providers let you transfer your premium to the new mortgage. Your eligibility and options will depend on a few things—like your situation, the amount of your loan, your premium, and how much you’ve already paid off.
Get in touch with BrokerLink today
To learn more about mortgage insurance, or if you have any questions regarding it, reach out to BrokerLink today. And while you're at it, don't forget to ask about your home insurance options as well, as choosing the right home, tenant, or condo insurance is just as important. If you’ve moved into a new place and haven’t set up coverage yet, one of our dedicated BrokerLink insurance advisers will help you find a policy that fits your needs perfectly. With our team’s in-depth knowledge of home insurance options, we can offer expert advice and compare policies from top insurers to find the best match for you.
You can reach us by phone, email, or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.
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