In Canada, a minimum 20% downpayment is mandatory for home purchases; however, with mortgage insurance, a buyer only needs a 5% to 19% downpayment.
For a $350,000 condo, a 20% downpayment equals $70,000: a significant sum for a first purchase. This is where mortgage insurance comes in. Its role is to protect the financial institution in case the borrower defaults on their loan.
Reassured, the bank will be more inclined to grant the borrower a mortgage. Both parties win!
The Main Insurance Providers
In Quebec, mortgage loan insurance is mainly offered by these two organizations:
- The Canadian Mortgage and Housing Corporation (CMHC): the most well-known and used insurer.
Sagen (formerly Genworth Canada): another big market player.
Good to Know
The lender selects the insurer. Various factors may influence their choice.
For example, the CMHC offers an advantageous programme for buyers needing a larger loan to cover the costs of renovations. “First-time buyers often have a limited budget,” notes Nathalie Bégin, real estate broker with RE/MAX, “so it’s optimal for them to spread out such major expenses over their mortgage payments.”
How Much Will the Borrower Pay?
Usually, the premium is based on the loan-to-value ratio (LTV) calculated by dividing the amount of the loan by the house’s purchase price. The higher the LTV, the higher the premium will be.
These are the CMHC’s rates for 2024:
| Downpayment | Loan/Value Ratio (LTV) | Insurance Premium (as a % of the total loan) |
|---|---|---|
| 5% to 9.99% | 90.01% to 95% | 4.00% |
| 10% to 14.99% | 85.01% to 90% | 3.10% |
| 15% to 19.99% | 80.01% to 85% | 2.80% |
Sample Scenario
If you purchase a $400,000 home with a 10% downpayment ($40,000), you will have to borrow $360,000, which means a 90% LTV. The premium therefore corresponds to 3.10% of the loan.
The CMHC premium = $11,160 ($360,000 × 3.10%)
Beware: rates may change over time depending on government policies, the insurer, your personal circumstances, and market trends. Checking current rates before you buy is recommended.
This premium is usually added to the loan and amortized with it. The buyer can also opt to pay it in one lump sum.
The Drawbacks
This insurance does increase the total amount the borrower must reimburse for the property in addition to the interest accrued on the loan. This is why it’s so important to understand that this insurance doesn’t protect the buyer, only the lender in the event of default.
Nevertheless, mortgage insurance is an essential tool that allows many first-time buyers to enter the property market sooner.
