What’s an insured mortgage?

Mortgages come in all shapes and sizes. While you may be familiar with the more common mortgage terms, such as open, closed, variable, and fixed, there’s always more to uncover when it comes to mortgages.

One of the more confusing mortgage concepts is insurance. Not only can you get mortgage life insurance to protect your estate in case you die before paying off your loan, you can also purchase mortgage loan insurance, which protects the lender should you default on your mortgage. The latter type of coverage is what people are referring to when they talk about insured mortgages.

Mortgage insurance = CMHC insurance

In Canada, mortgage loan insurance is offered exclusively through the Canada Mortgage and Housing Corporation (CMHC). However, while the policy is paid by mortgage lenders, the cost is passed down to you, the consumer.

The insurance premium is a percentage of your home’s purchase price, but that percentage is determined by the size of your down payment. Typically, the percentage will fall between 1.80% - 3.60%. Fortunately, CMHC provides an easy-to-use calculator for determining your premium.

And while it may not look like much, those extra percentage points will cost you tens of thousands of dollars. You can choose to pay that all at once or add it to your monthly mortgage payments. However, premiums in Manitoba, Ontario, and Quebec are also subject to provincial sales tax, and that tax can’t be added to your loan amount, so prepare for that when considering your closing costs.

Are all mortgages insured?

No. Most lenders will require you to get mortgage loan insurance if you’re making a down payment that’s less than 20% of the home’s purchase price. This insurance is not available for homes with purchase prices of $1 million or more, and those properties require minimum down payments of 20%.

What are the mortgage rules that apply to insured mortgages?

Because insured mortgages make up a significant portion of the mortgage market, rules for these mortgages tend to have a big impact on buying power. In 2016, in an effort to rein in the housing market, the federal government made a few changes to the rules affecting insured mortgages.

These changes include the following:

1. Increasing the minimum down payment to 10% (up from 5%) on the portion of mortgages that exceed $500,000 but are less than $999,999.
    
2. Requiring homebuyers who are applying for a fixed mortgage with a term of 5 years or more to also qualify for the Bank of Canada’s posted rate, which is usually higher than the rate buyers are applying for.
    
3. More stringent rules for high-risk buyers
    

Should you get an insured mortgage?

Generally speaking, a bigger down payment is better, especially if you can pay 20% up front and avoid CMHC coverage. However, there are situations where saving up for a bigger down payment may actually cost you more. After all, insured mortgages are typically subject to lower interest rates and administrative fees as the insurance coverage lowers the lender’s risk.  

Homeowners with energy efficient homes may qualify for a discount (up to 25%) on their CMHC premiums, reducing the financial impact of this insurance. Lastly, if you have high amounts of unsecured or high interest debt, it may be more economical to pay that off first, make a smaller down payment, and take the CMHC fee.