Under 20% down? Mortgage default insurance explained

If you are putting down less than 20% on a Canadian home purchase, mortgage default insurance is not optional—it is mandatory. Understanding how this insurance works, what it costs, and how to account for it in your budget is essential for anyone buying with a smaller down payment.

What Is Mortgage Default Insurance?

Mortgage default insurance (also called mortgage loan insurance or CMHC insurance) is a financial product that protects your lender if you stop making mortgage payments. It allows you to borrow more than lenders would normally permit, which means you can buy a home with as little as 5% down instead of saving 20% or more. The catch is important: the insurance protects the lender, not you. You pay the premium, but the benefit flows to your lender by reducing their risk.

Federally regulated lenders in Canada are required by the Bank Act to obtain this insurance whenever you put down less than 20%. This is a government-mandated safeguard that has made homeownership more accessible to Canadians, particularly first-time buyers and newcomers, but it does add to your total borrowing cost.

Minimum Down Payment Rules

Canada has clear rules about the smallest down payment you can make and still qualify for an insured mortgage. These thresholds are based on the purchase price of the home:

• For homes priced up to $500,000: a minimum down payment of 5% is required.
• For homes priced between $500,000 and $1,500,000: a minimum of 5% on the first $500,000, plus 10% on the portion above $500,000.
• For homes priced at $1,500,000 or more: mortgage insurance is not available; you must put down at least 20% as a conventional mortgage.

The tiered structure means that buying a $750,000 home requires a minimum of $50,000 down (5% of $500,000 = $25,000 plus 10% of $250,000 = $25,000). This is often less intuitive than a flat percentage, so use a mortgage calculator or speak with your lender to confirm your exact requirement before you start house hunting.

How Much Does the Insurance Cost?

The insurance premium is calculated as a percentage of your mortgage amount (the amount you borrow, not the home price). The rate depends on your loan-to-value ratio, which is the size of your loan relative to the home's purchase price. The smaller your down payment, the higher the premium percentage.

Current premium rates with a standard 25-year amortization are:

• 5% down (95% LTV): 4.0% premium
• 10% down (90% LTV): 3.1% premium
• 15% down (85% LTV): 2.8% premium

These percentages are applied to your mortgage balance. For example, if you buy a $500,000 home with 5% down, your mortgage is $475,000. The insurance premium at 4.0% equals $19,000. This amount is typically added directly to your mortgage balance, meaning you pay interest on it for the entire life of your loan.

Option: Pay the Premium Upfront

You can choose to pay the insurance premium in cash at closing instead of rolling it into your mortgage. This reduces your mortgage balance and lowers the total interest you will pay over time. However, this requires having extra cash available on closing day beyond your down payment and other closing costs. If you have the financial flexibility, paying the premium upfront is usually worth considering with your mortgage broker or lender.

The Three Insurance Providers

Three companies provide mortgage default insurance in Canada: CMHC (Canada Mortgage and Housing Corporation), Sagen (formerly Genworth Canada), and Canada Guaranty. CMHC is the largest and most well-known—it is a federal Crown corporation. Sagen and Canada Guaranty are private companies.

All three charge identical premium rates and follow the same underwriting rules set by the government. Your lender decides which insurer will cover your mortgage; you do not get to choose. For most homebuyers, the choice of insurer has no practical impact on your experience. If you have a non-traditional profile (self-employed, new to Canada, non-standard property), Sagen and Canada Guaranty sometimes have more flexible approval criteria, so if one insurer declines your application, your broker may be able to route it to another.

Provincial Sales Tax on the Premium

This is a crucial detail that many first-time buyers overlook. In Ontario, Quebec, Saskatchewan, and Manitoba, you must pay provincial sales tax on the insurance premium in cash at closing. Unlike the premium itself, this tax cannot be added to your mortgage—it is a separate closing cost you must have funds for.

• Ontario: 8% HST on the premium
• Quebec: 9% QST on the premium
• Saskatchewan: 6% PST on the premium
• Manitoba: PST also applies, though rates vary
• Other provinces: No provincial sales tax on the insurance premium

On the $500,000 home example above with a $19,000 premium, an Ontario buyer would owe an additional $1,520 (8% of $19,000) in cash at closing. In Quebec, that same buyer would owe $1,895 (9% of $19,000). This amount must be included in your cash-to-close calculation and cannot be overlooked during your budgeting process.

When Does the Insurance Disappear?

Once your down payment reaches 20% or more of the home's purchase price, mortgage default insurance is no longer required. If you are on the fence about whether to wait longer to save more, consider the math carefully.

At first glance, paying 2.8% to 4.0% of your mortgage in insurance seems expensive. However, several factors sometimes make an insured mortgage with a smaller down payment more attractive than waiting. Insured mortgages typically qualify for lower interest rates than uninsured (conventional) mortgages. Additionally, you can access your RRSP through the Home Buyers' Plan, which allows first-time buyers to withdraw up to $60,000 per person to help with a down payment. Over time, getting into the housing market sooner—even with insurance—can lead to greater gains from home appreciation than renting and saving for another year or two.

That said, if you can reach 19.9% down, the insurance premium drops to 2.8%, which is the lowest rate available and may be worth the extra saving. Discuss the timing trade-offs with a mortgage broker who can model your specific situation.

Who Qualifies for Mortgage Insurance?

Mortgage insurance is available only for owner-occupied residential properties intended as your primary residence. Investment properties, rental properties, second homes, and vacation properties require a minimum 20% down payment and do not qualify for any mortgage default insurance.

To qualify for an insured mortgage, you typically need to meet these criteria:

• Minimum credit score of 600 (though 680 or higher is recommended for smoother approval).
• A maximum Gross Debt Service (GDS) ratio of 39% (your housing costs as a percentage of gross household income).
• A maximum Total Debt Service (TDS) ratio of 44% (all your debt payments as a percentage of gross household income).
• Canadian citizenship, permanent residence (PR), or a valid work permit.
• Maximum amortization of 25 years (30 years available for first-time home buyers or purchasers of newly built homes, with a small premium surcharge).

Newcomers to Canada who do not yet have an established credit history may still qualify; lenders and insurers can consider alternative methods of assessing creditworthiness. Speak with a broker experienced in working with immigrants—programs exist specifically to help newcomers and those new to the Canadian financial system.

Key Terminology You Will Encounter

As you navigate the mortgage process, you will encounter several important terms:

• Loan-to-Value (LTV): The size of your mortgage divided by the home's purchase price, expressed as a percentage. An 80% LTV means you borrowed 80% of the home's value (or put down 20%).
• High-ratio mortgage: A mortgage with an LTV of more than 80%—in other words, a mortgage that requires insurance.
• Amortization: The number of years over which you repay your mortgage (typically 25 or, for eligible buyers, 30 years).
• GDS and TDS: Debt service ratios that lenders use to assess your ability to carry a mortgage alongside your other financial obligations.

Insurance Is Not Refundable

One important limitation: mortgage default insurance premiums are not refundable if you pay off your mortgage early or renew it with a different lender. This means if you obtain an insured mortgage, pay down the principal aggressively, and later refinance at 20% equity, you cannot recover the insurance premium you already paid. Plan your mortgage strategy with this in mind, especially if you anticipate significant income growth or inheritance that would allow you to pay down the mortgage ahead of schedule.

Getting Your Mortgage Approved

When you apply for an insured mortgage, your lender will assess your creditworthiness, income stability, and debt service ratios before forwarding your application to an insurer for final approval. The insurer performs its own underwriting to confirm you meet their lending criteria. This process typically takes one to two weeks, though it can be faster for straightforward applications.

Your lender will give you the exact insurance premium amount and any applicable provincial sales tax once your mortgage is approved. At that point, you can decide whether to roll the premium into your mortgage or pay it upfront. Make sure you understand the full cost of closing—down payment, premium, provincial tax, legal fees, land transfer tax, title insurance, and any other adjustments—before you reach closing day.

The Bottom Line for Newcomers and First-Time Buyers

Mortgage default insurance is a tool that makes homeownership more accessible in Canada. By allowing you to buy with 5% down, it removes a significant barrier for people who do not have years to save. The premium cost and provincial sales tax are real expenses that should be factored into your budget, but in many cases, entering the property market sooner—even with insurance—is a sound financial decision.

As you plan your home purchase, work closely with your lender and a mortgage broker who understands your profile as a newcomer or first-time buyer. They can help you model different down payment scenarios, explain the insurance cost in the context of your long-term financial plan, and make sure you do not miss any hidden closing costs. Getting this right at the beginning sets you up for success in your new Canadian home.