Have you heard of these three companies? It’s very likely you would have heard of the Canadian Mortgage and Housing Corporation if you’ve been searching for a house, but the other two may not be as well known. These companies all provide the same service – mortgage default insurance.

What is Mortgage Default Insurance?

When you take out a life insurance policy, you’re paying the insurance provider to give your beneficiaries money in the event of your death. The premiums you pay are determined by factors such as age, health, and lifestyle, as these make up your risk.

When you take out a mortgage default insurance policy, you’re paying the insurance provider to give your creditors money in the event you default on your mortgage. This could be because of situations like bankruptcy or death. The premiums you pay are determined by factors such as your down payment and the value of the home.

The higher your risk, the higher the premiums will be on your policy. Insurance companies prefer not having to pay out claims, as claims can cost anywhere from a thousand dollars to several million dollars. Each claim reduces the profitability of the insurance company. So, if they suspect that you will require claims to be made, they charge higher premiums to pre-emptively make up for the future losses.

A safe driver with no speeding tickets or prior collisions will not pay much per month, as they are unlikely to be in a crash. The insurance company lowers their premiums as a reward for safe behavior, to entice them to stick around.

Do I Need Mortgage Default Insurance?

Mortgage default insurance is a legal requirement for a home purchase with a down payment of 5 - 19.99%. Down payments of 20% or higher do not require mortgage default insurance. In Canada, you must have a down payment of at least 5% in order to purchase a home.

The 5 – 19.99% rule applies to all houses valued up to $999,999. For houses valued at $1 million or more, you must provide a down payment of at least 20%, and are therefore exempt from requiring mortgage default insurance. Mortgages granted with mortgage default insurance are capped at a maximum 25 year amortization period.

A mortgage received after a down payment of less than 20% is often referred to as a CMHC mortgage. Much like the Kleenex brand has become synonymous with facial tissues, the Canadian Mortgage and Housing Corporation has become synonymous with mortgage default insurance. While CMHC does provide mortgage default insurance, there are also two other providers: Genworth Financial and Canada Guaranty.

Do These Companies Affect My Approval?

If you have a loan-to-value ratio (LTV) of more than 80%, these three companies may be the make-or-break point of your mortgage application. You absolutely must be approved by them if you are unable to increase your down payment. Lenders are legally obligated to make sure you have mortgage default insurance on a mortgage of over 80% LTV, so don’t think you can negotiate a deal if you’re denied.

While it doesn’t happen often, CMHC, Genworth or Canada Guaranty can deny a mortgage default insurance policy. Since you get pre-approved for a mortgage before you receive mortgage default insurance, those three companies have the final say in your approval. If you’re denied, you might have to lower your budget and expectations. Being denied on one specific mortgage doesn’t mean that you will never get any mortgage.

Mortgage Default Insurance Pricing

The premiums on your mortgage are calculated with a simple equation:

Mortgage Default Insurance Premium = Mortgage Amount × Premium Percentage

Keep in mind that the mortgage amount is the total value of the home less the value of your down payment.

Your premium percentage is determined according to this chart:

A home with a value of $375,000 and a down payment of $33,500 would leave a mortgage amount of $341,500. The down payment would be 8.93% of the purchase price, resulting in a premium percentage of 4%. Therefore, the cost of getting mortgage default insurance would be:

$341,500 × 4% = $13,660

This value is added back on to the cost of your mortgage, so your new mortgage amount would be

$341,500 + $13,660 = $355,160.

Because the value is added onto your mortgage, you pay off the insurance at the same time you pay off your mortgage. You pay a slightly higher monthly fee, but your lender is protected in the case you are unable to make your payments.