Mortgage Loan Insurance

It insures the lender, not you

Mortgage default insurance is not protection for you. If you lose your job and cannot make the payments, the insurance does not step in and cover them. It covers the lender’s loss if you default and the property sells for less than what you owe.

You pay for a policy that benefits someone else. That sounds unfair until you see what it buys you: without it, a lender is not permitted to lend at a high share of the property’s value at all. The insurance is the reason a small down payment is possible in the first place, and it is the reason lenders will price a high-ratio mortgage competitively — their risk is covered, so yours is the only credit risk being priced.

Separately, there is a product called mortgage life or mortgage protection insurance, which does pay out to cover your mortgage if you die or become disabled. That is a completely different thing, it is optional, and it is sold by insurers and banks rather than required by federal rule. Do not confuse the two.

When it is mandatory

It is mandatory whenever your down payment is below the conventional share of the purchase price. There is no opting out and no shopping around to avoid it.

A mortgage that requires it is called a high-ratio mortgage. One that does not is called conventional. The line between them is a fixed percentage set federally, and it is the same line that governs the minimum down payment rules.

There are also eligibility limits on the insurance itself. The property has to be in Canada, the purchase price has to be under a maximum, your debt-service ratios have to fit inside the insurer’s limits, and the amortization is capped. If a file fails any of those, insurance is not available — which in practice means the mortgage is not available at that down payment.

The three insurers

Three companies provide mortgage default insurance in Canada: CMHC, which is a federal Crown corporation, and two private insurers, Sagen and Canada Guaranty.

You do not pick. Your lender chooses which insurer to submit your file to, and different lenders have different default relationships. Their core rules are closely aligned because the federal government backs all three and sets the parameters, but their underwriting appetite and their niche programs are not identical.

This occasionally matters. A file that one insurer declines — an unusual property, a self-employed income structure, a rural well and septic — can sometimes be approved by another. If your file is unusual and comes back declined, it is a fair question to ask your mortgage professional whether it was submitted to more than one insurer.

How the premium is calculated

The premium is a percentage of your mortgage amount, and the percentage is set by a published rate table.

The table is banded by loan-to-value ratio — your loan divided by the value of the property. The higher the ratio, meaning the smaller your down payment, the higher the percentage. The bands step up, so moving your down payment across a band boundary drops you to a lower rate on the entire loan, not just on the difference.

That last point is worth acting on. If you are close to the top of a band, finding a modest amount of additional down payment can move you into a cheaper band and save you more than the amount you added. Ask your mortgage professional to show you the rate table and where you land on it.

There is also a higher rate that applies when the down payment comes from a borrowed source rather than from savings or a gift, and there are separate rates that apply when you port an existing insured mortgage to a new property and increase the loan.

How it is paid — and the Ontario tax that is not

The premium itself is almost always added to your mortgage principal rather than paid at closing. You then pay it off, with interest, over the life of the loan. That means it does not increase the cash you need on closing day, but it does increase your balance, your payment and your total interest.

The provincial sales tax on the premium is treated differently, and this catches people out. Ontario charges provincial sales tax on the mortgage insurance premium, and CMHC is explicit that this tax cannot be added to the loan amount. Quebec and Saskatchewan do the same.

So in Ontario, the tax on the premium is a closing cost. It is due in cash on closing day, along with your land transfer tax and legal fees. It is not enormous relative to the purchase, but it is real, it is often missed in a first budget, and your lawyer will expect it. Ask for the exact figure once your mortgage is approved and add it to your closing-cost list.

• Premium: added to the mortgage, paid over time, with interest.
• Ontario provincial sales tax on that premium: cash at closing, cannot be financed.
• Both are calculated off the loan amount, so a smaller loan reduces both.

What you actually get for it

Even though the policy protects the lender, the premium buys you three real things.

It buys access — a mortgage at a down payment you could otherwise not use. It usually buys a competitive interest rate, because an insured loan carries less risk for the lender than an uninsured one at the same ratio. And it buys portability: insured mortgages can generally be ported to a new property, and if you move within a set period you may be able to apply a credit for the premium you already paid rather than paying a full new one.

Some insurers also offer a partial premium refund on an energy-efficient home or a qualifying energy retrofit. It is applied for after closing, it is not automatic, and the qualifying criteria are specific. Worth asking about if you are buying a new build with an efficiency certification.

How to pay less of it

There are only a few honest levers, and none of them are tricks.

Increase the down payment enough to cross into a lower rate band, or enough to clear the conventional threshold and avoid the premium entirely. Buy at a price where your available down payment lands in a better band. Use a down payment from savings or a family gift rather than a borrowed source, since borrowed funds carry the higher rate. And if you already have an insured mortgage and are moving, ask about porting it before you discharge it.

What does not work is trying to structure around the rule. Lenders and insurers verify the source of the down payment, and a mortgage arranged on a misstatement of that source is mortgage fraud, not a saving.

What trips people up

The recurring ones, in order of how often they come up.

• Believing the insurance protects them. It protects the lender.
• Not budgeting the Ontario provincial sales tax on the premium as a cash closing cost.
• Landing at the very top of a rate band when a small amount more down would have moved them into a cheaper one.
• Not knowing that a borrowed down payment carries a higher premium rate and tighter eligibility.
• Discharging an insured mortgage on a move instead of porting it, and paying a fresh full premium.