Glossary
Mortgage Default Insurance
Insurance that protects the lender, not the borrower, when a high-ratio mortgage goes into default and the home sale does not repay the debt..
Mortgage default insurance is insurance that protects the lender, not the borrower, when a borrower defaults on a high-ratio mortgage and the lender must recover its money through foreclosure or power of sale. It covers the lender's loss, up to the limits of the policy, when the sale of the property brings in less than the amount owed.
Who it protects, and who pays for it
Federal rules require default insurance on mortgages where the borrower's down payment falls below the threshold that separates a high-ratio mortgage from a conventional one. That is why it is also described as high-ratio mortgage insurance. The protection flows to the lender, but the borrower pays the premium. Three providers write this coverage in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty.
How the premium is charged
The premium is calculated as a percentage of the mortgage amount. It varies with the loan-to-value ratio and the length of the amortization period, and each insurer publishes its own current premium table. A borrower may pay the premium up front or add it to the mortgage balance, in which case interest is charged on it for as long as the loan is outstanding. Running the numbers through a CMHC mortgage insurance calculator shows how that affects the total borrowed.
Why it matters to a borrower
- It allows a smaller down payment than an uninsured lender would normally accept, so a buyer can enter the market sooner.
- It adds a cost that a conventional mortgage does not carry, and it increases the balance on which interest is calculated if the premium is financed.
- It is not the same as title insurance, which covers defects in ownership, or mortgage life insurance, which pays a benefit on death.
- It does not protect the borrower from missed payments; arrears can still lead to foreclosure or power of sale.
Lenders treat default insurance as a form of risk transfer, which is one reason insured mortgages are subject to the federal mortgage stress test and to OSFI's residential underwriting expectations. A borrower who wants to avoid the premium generally needs a down payment large enough to make the mortgage conventional, or a lender that does not require insurance. Requirements and premiums change, so confirm the current figures with the insurer or a mortgage professional. For a fuller walkthrough, see the guide to mortgage default insurance in Canada.
Frequently asked questions
Who actually pays mortgage default insurance?
The borrower pays the premium even though the protection belongs to the lender. It is often added to the mortgage balance, so interest is charged on it too. If a foreclosure or power of sale does not recover the full debt, the insurer reimburses the lender, and the borrower may still be pursued for any remaining shortfall.
Is mortgage default insurance the same as mortgage life insurance?
No. Mortgage default insurance covers the lender when a borrower stops paying on a high-ratio mortgage. Mortgage life insurance is an optional product that pays a benefit when the borrower dies. Title insurance is different again, covering problems with ownership of the property rather than payment default.
Can I avoid paying mortgage default insurance?
Usually only by making a down payment large enough that the mortgage is conventional rather than high-ratio, or by borrowing from a lender that does not require insurance. Federal rules govern insured mortgages, so confirm the current requirement with the insurer or a mortgage professional before assuming a purchase will be exempt.
Sources
Related terms
- High-Ratio Mortgage — A high-ratio mortgage exceeds 80% of a property's value or purchase price, meaning the down payment is under 20%, and it must be insured against default.
- Canada Mortgage and Housing Corporation (CMHC) — CMHC is the federal Crown corporation that insures Canadian mortgages against borrower default and publishes national housing data and research.
- Down Payment — A down payment is the portion of a home's purchase price a buyer pays upfront, reducing the amount borrowed through a mortgage.
- Conventional Mortgage — A conventional mortgage is a home loan at 80% or less of the property's value, so mortgage default insurance is not required.
- Loan-to-Value Ratio (LTV) — The loan-to-value ratio (LTV) is the size of your mortgage expressed as a percentage of the property's appraised value or purchase price.