In Canada, you can purchase a house without having 20% down payment, but you pay for the privilege. Without that full down payment of 20% your mortgage is considered high-ratio instead of conventional and you will have to pay the cost of mortgage default insurance, commonly referred to as mortgage insurance. That premium is paid by you, but it protects your lender. If you default on your mortgage your lender is protected by the insurance policy you purchased. The insurer would be responsible for paying out your lender.
How It’s Calculated
Premiums for mortgage insurance are calculated as a percentage of your mortgage loan (not purchase amount). For every 5% increment of down payment, that percentage decreases. If you have 5% down payment, the premium is 3.15% of your loan amount. If you have 10% down payment, the premium is 2.4% of your loan amount, and so on. Basically, the more down payment you have, the less likely you are to default on your mortgage. You are seen as less risky so you pay less. Even if you can’t make it to 20% down payment, the more you have, the cheaper the premium.
You only pay for mortgage insurance once on the same property (unless you refinance). Mortgage lenders roll your mortgage insurance premium into your loan at the start of your mortgage. You technically could pay it up front in a lump sum, but if you had that cash, you’d just put that to down payment to reduce your mortgage insurance premium costs.
Example – The More Down Payment, The Cheaper It Is
If you are purchasing a $400,000 home for your family to live in, this is how the mortgage insurance would be calculated:
- 5% down payment – You would have a $20,000 down payment and therefore a $380,000 mortgage loan. Mortgage insurance premium would be $11,970 (3.15% x $380,000). Your total loan would be $391,970.
- 10% down payment – You would have a $40,000 down payment and therefore a $360,000 mortgage loan. Mortgage insurance premium would be $8,640 (2.4% x $360,000). Your total loan would be $368,640.
- 15% down payment – You would have a $60,000 down payment and therefore a $340,000 mortgage loan. Mortgage insurance premium would be $6,120 (1.8% x $340,000). Your total loan would be $346,120.
- 20% down payment – You would have an $80,000 down payment and a $320,000 mortgage loan. There would be no mortgage insurance premium charged so your total loan would be $320,000.
This Is Not Life or Home Insurance
There are so many types of insurance discussed when you are purchasing, it’s easy to get confused. Mortgage insurance is not life insurance. There is mortgage life insurance, but this is different. Mortgage life insurance is paid by you and protects you by covering your mortgage in the event of illness or death. This is also different than the home insurance policy you will pay that protects your property from fire, etc.
Fast Facts - Did You Know?
- There are three mortgage insurance providers in Canada: Canadian Mortgage and Housing Corporation (CMHC), Genworth Canada, and Canada Guaranty.
- There are perks to having mortgage insurance. The lender is protected so they actually see your mortgage as safer than one that is not insured. You will have access to the best rates now and at renewal because a lender would prefer to hold your loan over one that is not protected if the borrower defaults.
- If you sell and buy within 2 years of your initial purchase, at least a portion of your mortgage insurance may be portable to another property, saving you the cost of new premiums.
- For some mortgage products, 20% down payment is not conventional and will still require an insurance premium. Lenders may pay them on your behalf or pass them on to you. Examples include New to Canada purchases and rental purchases.
- Many lenders choose to back-end insure your mortgage even if you have 20% down payment. They pay the premium but your mortgage will still need to meet insurer guidelines.