Mortgage insurance is one of those costs that can surprise buyers. You may need to pay for it, but the policy protects your lender. So what are you getting in return?
I’m talking about mortgage default insurance, often called “CMHC insurance.” It allows eligible buyers to purchase a home with less than 20% down. It is different from mortgage life insurance, which is intended to pay off a mortgage if a borrower dies.
When do you need it?
If your down payment is less than 20%, mortgage default insurance is generally required. For a home priced at $500,000 or less, the minimum down payment is 5%. Above $500,000, you need 5% on the first $500,000 and 10% on the portion above that. Homes priced at $1.5 million or more are not eligible for this insurance and require at least 20% down.
For example, the minimum down payment on a $600,000 home is $35,000: $25,000 on the first $500,000, plus $10,000 on the remaining $100,000. That gets you to the minimum down payment, but you would still need default insurance because you’re putting down less than 20%.
How much does it cost?
The premium depends largely on your mortgage amount and the size of your down payment. It’s a one-time cost that you can usually pay upfront or add to the mortgage. If you add it to the mortgage, you’ll also pay interest on that added amount over time.
Using the $600,000 example, a $35,000 down payment leaves a $565,000 mortgage before insurance. At CMHC’s standard 4% premium for that down payment range, the premium would be $22,600. Added to the mortgage, that would bring the starting balance to $587,600. The exact cost can differ depending on the insurance product and mortgage details.
Why would anyone choose to pay it?
The benefit is that you may be able to buy without waiting to save a 20% down payment. Insured mortgages may also come with competitive interest rates, though a lower rate does not automatically make the mortgage cheaper once you include the premium.
Some buyers also qualify for a 30-year insured mortgage amortization if at least one borrower is a first-time buyer or the home is newly built. A longer amortization can lower the required monthly payment, while increasing the interest paid if you take the full period to repay the loan.
Should you wait until you have 20% down?
That depends on your savings, the home you’re considering and what the payments would leave you each month. Reaching 20% down avoids the default insurance premium, but using every available dollar for the down payment can leave you short for closing costs, repairs and the ordinary surprises of homeownership.
When I work through this with a buyer, I’d compare the full cost of buying now with the cost of waiting, including the insurance premium, mortgage payments and cash left after closing. The useful question is not simply “Can I avoid insurance?” It’s “Which option leaves me in a comfortable financial position?”
If you have questions or want to get started on your journey to home ownership, contact me.
