Mortgage Insurance: What Is It, And When Do I Need It?

In Canada, mortgage lenders require mortgage insurance for any mortgage initiated with a down payment anywhere between 5% and 19.99%. The borrower is on the hook for this additional cost, which will reflect in increased monthly payments on their mortgage.

Before you shop the market for a competitive mortgage rate, it’s essential to have a solid understanding of what you can afford for a down payment. If you know that 20% of the home’s total value is out of reach for your financial situation, you can expect to have the cost of mortgage insurance (AKA “mortgage default insurance”) to be added onto your payment costs.

But what is mortgage insurance, exactly? Who does it protect? Does mortgage insurance offer any benefits to the borrower? Read on to have all of these questions, and more, answered.

What Does Mortgage Insurance Protect Against?

Mortgage default insurance does not protect the borrower of the mortgage, but rather the lender. This type of insurance comes with a premium that is charged to the lender, protecting the lender if the borrower defaults on their loan.

How are Insurance Premiums Calculated?

The necessity of mortgage insurance is seen mostly in situations where the down payment on a home was smaller than 20%. When a home buyer offers a down payment between 5% and 19.99%, they will typically be forced to pay this premium throughout the duration of their mortgage term.

The value of a mortgage insurance premium is decided based on a number of factors, but most especially the size of the down payment offered by the buyer. If you pay closer to 5% than 19.99%, you can expect to be paying a higher premium than if you paid more.

Who Offers Mortgage Insurance?

In Canada, there are only three offices that issue mortgage insurance policies to lenders:

  • Canada Mortgage and Housing Corporation (or the CMHC)
  • Genworth Financial Canada
  • Canada Guaranty

How is Mortgage Insurance Paid?

Mortgage insurance, an expense passed along from the lender to the borrower, can be paid one of two ways: In a large, singular sum, or over the course of the mortgage in monthly payments.

While the idea of paying more per month or at the start of the mortgage can make a home buyer cringe, mortgage insurance has made it possible for more people than ever before to obtain their dreams of home ownership. For many of us, 20% of a home’s total value is way too much to be able to throw down right at the beginning. Mortgage insurance makes it possible to get set on the path to home ownership with as low as a 5% down payment, which is much more attainable for most Canadians.