Mortgage default insurance is a mandatory one-time premium that protects your lender if you default on your mortgage. It is required in Canada whenever your down payment is less than 20% of the purchase price, and it applies to properties priced up to $1.5 million.
Despite the fact that you pay for it, mortgage default insurance does not protect you as the borrower. It protects lenders in the event a borrower defaults on their mortgage loan. The rationale is straightforward: borrowers who make smaller down payments are considered to be higher risk, with less equity paid up front in their home. By insuring that risk, lenders are willing to approve mortgages with as little as 5% down.
CMHC is not the only provider of mortgage default insurance in Canada; there are two other providers, called Sagen and Canada Guaranty. The premium rates are identical across all three providers, so it doesn't matter which one insures your mortgage. Which insurer you go with is generally determined by your mortgage lender at the underwriting stage.
The premium is calculated as a percentage of your mortgage amount, not the purchase price, and the rate depends on the size of your down payment. The rates are 4.00% of the mortgage amount for a 5 to 9.99% down payment, 3.10% for 10 to 14.99% down, and 2.80% for 15 to 19.99% down. Those who are eligible for a 30-year amortization while having an insured mortgage must add 20 basis points to their default insurance premium. For example, those who have made a down payment of 5 to 9.99% would have a premium of 4.20%.
Most buyers add the premium to their mortgage balance rather than paying it upfront, which means you pay interest on it over the life of the loan. Ontario charges PST on mortgage default insurance at a rate of 8% of the premium amount, and this tax must be paid in full when your house closes. Unlike the premium itself, the provincial sales tax cannot be rolled into your mortgage.
There is one counterintuitive benefit worth understanding. Insured mortgages, or high-ratio mortgages, generally have lower mortgage rates when compared to uninsured mortgages, meaning your mortgage interest savings can offset insurance fees. That lower rate applies for the entire amortization, so the net cost of the insurance is not always as steep as the premium figure suggests.
For a closer look at what you need to save before buying, see our article on closing costs.