In Canada, mortgage insurance is required federally on all high-ratio mortgages - that is, mortgages with a down payment of 19.99% or less. This insurance, which protects the lender in case of borrower default - meaning you, the home owner, for any reason cannot make your mortgage payments and go into foreclosure.  Having less equity in your home is what makes you higher risk.  In Alberta the foreclosure process can cost upwards of $60,000-$80,000 a times by the time interest losses, realtors and lawyers are paid.  A process this costly would likely cost more than your equity in your home.  The default insurers would then step in and pay the losses to the bank or mortgage lender.  You would then work with the mortgage default insurer to work out a way to pay for those losses.

Mortgage insurance premiums are based on the amount of the mortgage and the percentage of down pmt. They are a one time fee charged at the time of you purchasing your home and are added to the mortgage amount and paid over the length of the mortgage. 

This insurance is not to be confused with mortgage life insurance, which protects homeowners and their families in the event of death or illness.

There are 2 basic types of mortgages. These types depend on the amount of equity or down payment that is present at the time of financing approval.

Conventional Mortgage. The down payment you are providing at the time of purchase or the equity already present in your home is 20% or more.  If you are buying a home as a rental property/investment you will be required to have a minimum down payment of 20% resulting in conventional mortgage. Clients purchasing an owner occupied home are exempt from default insurance fees. Those who are purchasing investment properties may be subject to a default insurance fee. 

Example: With a property value of the home at $400,000 and 20% down payment minimum being needed ($80,000) for the conventional mortgage the loan would be a maximum of $320,000. If the loan amount was any higher it would be high ratio.

High-Ratio Mortgage. The down payment is between 5%-19.99% of your purchase price of your home. Federal lending rules dictate that a high ratio mortgage must be insured with borrower default insurance at the cost of the borrower. 

Example: Property value of the home is $400,000. Down payment available is $50,000 and the mortgage $350,000.

$50,000/$400,000 = 12.5% down payment

350,000/400,000 = 87.5% mortgage

Since the mortgage loan amount is more than 80% and the down payemnt less than 20% the loan is high ratio and needs to be insured. 

 

Default fees are charged based on your down payment. 

5%-9.99% = Fee is 4.0%

10%-14.99% = Fee is 3.10%

15%-19.99% = Fee is 2.80%

Example: You buy a home for 300k with 5% down pmt ($15,000 down payment)

$300,000-$15,000 = $285,000 mortgage money being borrowed

The fee on a 5% down is 4%

$285,000 mortgage x 4% fee = $11,400 CMHC fee

$285,000 + $11,400 fee = total loan amount of $296,400

Your monthly payments for your mortgage will be based on the $296,400.