Buying a home in Canada with a mortgage, especially after renting, can be confusing. One item of a mortgage that borrowers often have questions on is mortgage insurance. Mortgage default insurance is also known as CMHC insurance. This is a mandatory insurance that home buyers must pay if they are making a down payment of less than 20%. Knowing about CMHC insurance and what you can do to minimize your CMHC insurance premium can help you save money when the time comes to buy a home. Here's what you need to know.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

How Does Mortgage Default Insurance Work?

Mortgage default insurance is a type of insurance that minimizes risk for mortgage lenders. Mortgage default insurance pays for the balance on the mortgage if the borrower defaults on their loan. It is this insurance that enables lenders to make loans to higher-risk buyers who are unable to pay the 20% down payment.

How Can You Calculate Mortgage Default Insurance?

Mortgage default insurance is calculated as a percentage of the mortgage, depending on how big the down payment is. It is then added to the total mortgage balance. The table below shows the buyer how much they can expect to spend on CMHC insurance based on their down payment and a 25-year amortization period.

The easiest way to understand how mortgage default insurance works is to read an example. Suppose a home buyer would like to purchase a home for $400,000. The buyer makes a down payment of 10%, or $40,000. This would require the buyer to have a mortgage of $360,000. The mortgage insurance premium for such a mortgage would be 2%, or $7,200. This would require the home buyer to get a total mortgage of $367,200.

What Can You Do if You Want to Avoid Paying Mortgage Default Insurance?

The only way to avoid paying mortgage default insurance in Canada is to make a down payment of at least 20%. This either requires the home buyer to save the 20%, or buy a home with a lower asking price, so the amount they have saved is worth 20% of the home's purchase price. For many home buyers, this means working with a skilled real estate professional who can help them negotiate the best price possible for the home.

What if You Can't Get Mortgage Default Insurance?

It's not possible to get mortgage default insurance on mortgages over $1,000,000, which means that the home buyer must have at least a 20% down payment for homes of this price. If the home buyer has a less than 20% down payment for such a home, they would need to either negotiate a lower price for a home or save the money required to make the 20% down payment.

How Can You Learn More about Mortgage Default Insurance?

If you're a homeowner who would like to learn more about mortgage default insurance, talk to a lender. Your lender can help answer your questions about CHMC insurance, and can answer your questions about mortgages generally.

You can also ask some of your mortgage-related questions of your real estate professional. A good real estate professional can help you understand your mortgage and also what it takes to buy a Waterways new home. For more information, contact the experts today.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.