Understanding Mortgage Insurance in Canada: A Complete Guide

Homeownership can be overwhelming, especially when it comes to understanding the various financial products involved. Among these, mortgage insurance is a critical component that can significantly impact your home-buying experience and financial security.

Whether you are a first-time homebuyer or looking to refinance your existing mortgage, understanding mortgage insurance is essential. So, this comprehensive guide to mortgage insurance in Canada will break down everything you need to know.

We will explore the types of mortgage insurance available, their benefits and drawbacks, the costs involved, and how they can affect your homeownership journey.

What is mortgage insurance?

In Canada, mortgage insurance is a financial protection product otherwise known as creditor insurance. It is typically offered by your mortgage lender. In the unfortunate event of your death, if your mortgage is still outstanding, mortgage insurance pays the debt you owe to your bank for your mortgage loan.

An example of how mortgage insurance works

Let’s say you are purchasing a house for $100,000.

• You pay a 15% down payment ($15,000).
• The amortization period is 25 years.
• Leaving an $85,000 mortgage loan that you need to pay off over the next 25 years.

If you die within this 25-year period, your lender still expects to be paid back. Without this insurance, your family or your estate will need to come up with $85,000 by dipping into their savings or selling the property to settle the mortgage loan.

Mortgage insurance ensures that the mortgage loan is paid off in these circumstances. This kind of insurance is sometimes referred to as mortgage life insurance or private mortgage insurance.

Read our full review of the Best Mortgage Insurance Companies in Canada. 

What are the types of mortgage insurance?

There are three main types of mortgage insurance in Canada, 

• Mortgage default insurance
• Mortgage loan insurance
• Optional mortgage protection insurance

Mortgage default insurance

Mortgage default insurance is mandatory coverage in Canada for homebuyers with a down payment of less than 20%. This insurance protects lenders in case the borrower defaults on their mortgage. 

For example, if you buy a house for $400,000 with a 5% down payment, mortgage default insurance reduces the lender’s risk and lets you secure a mortgage despite the smaller downpayment.

Mortgage loan insurance

Mortgage loan insurance, also known as CMHC insurance, works like mortgage default insurance, protecting lenders against the risk of borrower default. This insurance allows buyers to secure a home loan with a smaller down payment. 

For instance, if you put down 10% on a $500,000 home, mortgage loan insurance safeguards the lender, making it easier to obtain mortgage approval in the Canadian housing market.

Optional mortgage protection insurance

Optional mortgage protection insurance is an additional policy that homeowners in Canada can purchase to enhance their financial security. This insurance provides support to cover mortgage payments in case of unforeseen events such as disability, critical illness, or death.

For example, if the primary breadwinner in your family becomes critically ill, this insurance can help cover the mortgage payments, ensuring your family can maintain their home without facing financial hardship.

Benefits of mortgage insurance

Mortgage insurance has several advantages, like:

• Financial security for lenders: Mortgage insurance, whether mandatory or optional, protects lenders. It reduces the risk of borrower default so that lenders can recover their funds even if the borrower is unable to continue making payments
• Enables homeownership with lower down payments: Mortgage insurance makes homeownership accessible to more Canadians by allowing for smaller down payments. Without this insurance, many potential buyers would need to save for a much larger down payment, delaying their ability to purchase a home
• Access to competitive mortgage rates: With mortgage insurance, lenders face reduced risk, which can result in lower interest rates for borrowers. This can lead to significant savings over the life of the mortgage and make homeownership more affordable
• Stability in the housing market: Mortgage insurance contributes to the stability of the Canadian housing market by protecting lenders from widespread defaults. This stability can help prevent housing market crashes and maintain overall economic health
• Stabilizes the housing market during economic downturns: During economic downturns, mortgage insurance plays a crucial role in stabilizing the housing market. By protecting lenders, it helps prevent a surge in foreclosures and supports market stability
• Flexibility for borrowers: Mortgage insurance provides flexibility for borrowers to purchase a home sooner with a lower down payment. This flexibility can be crucial for first-time homebuyers or those looking to upgrade to a larger property
• Enhanced borrower qualifications: With the protection of mortgage insurance, lenders are often more willing to approve borrowers who may not meet traditional lending criteria. This can include individuals with lower credit scores or those with less established credit histories

Drawbacks of mortgage insurance

While mortgage insurance comes with several benefits, it also has a few drawbacks:

• High costs and added interest on premiums: Premiums can be high, and if added to your mortgage balance, you’ll pay interest on them over the life of the loan, raising the total amount paid
• Impact on home equity: Premiums added to your loan balance can slow the rate at which you build equity in your home
• Provincial sales tax requirements: In some Canadian provinces, mortgage insurance premiums are subject to provincial sales tax, increasing the overall cost
• Long-term cost: While enabling homeownership sooner, the long-term cost of paying premiums over several years can be substantial

Key differences in insurance types

Mortgage Default Insurance vs. Mortgage Protection Insurance

Here’s how mortgage default insurance and mortgage protection insurance differ:

To learn more about how mortgage default insurance works and how much it costs, head to our CMHC Mortgage Default Insurance Calculator.

Is mortgage loan insurance the same as mortgage protection insurance?

No, mortgage loan insurance and mortgage protection insurance are not the same. Mortgage loan insurance is mandatory for homebuyers who make a down payment of less than 20%.  Mortgage protection insurance is optional. Here are some of the key differences between the two:

Mortgage Loan Insurance

• Often referred to as CMHC insurance, mortgage loan insurance is mandatory  for homebuyers who make a down payment of less than 20% of the home’s purchase price
• This insurance protects the lender against the risk of borrower default. It ensures that the lender can recover their funds even if the borrower is unable to continue making mortgage payments 
• The cost of mortgage loan insurance is typically added to the mortgage amount, which can affect monthly payments and the overall cost of homeownership

Mortgage Protection Insurance

• It is an optional policy that homeowners can purchase to protect themselves and their families
• This insurance provides coverage in case the homeowner experiences a critical illness, disability, or death 
• The benefits of mortgage protection insurance are paid directly to the borrower or their family, helping to cover mortgage payments or pay off the remaining balance

• Unlike mortgage loan insurance, mortgage protection insurance is not required by lenders and serves to offer additional peace of mind and financial security to the homeowner