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High Ratio Insurance

In Canada, when you put less than 20% down payment you are required to pay for mortgage insurance. This insurance is designed to protect the Lender against any losses from a default situation. It is commonly referred to interchangeably as “Default Insurance”, “High Ratio Insurance”, or “CMHC Insurance”.

The minimum down payment in Canada is 5% unless the purchase price above $500,000 then the minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.

There are three mortgage insurers in Canada and the lender selects the insurer.

  1. Canada Mortgage Housing Corporation (CMHC) – a Crown corporation set up in 1946 to encourage mortgage loans to returning war veterans        
  2. Genworth MI Canada – a publically traded company on the TSX
  3. Canada Guaranty – private company that is half owned by Ontario Teachers

The premiumcost of the insurance depends on how much is being put down, as a percentage of the purchase price and the type of property. Rentals have much higher premiums than owner occupied.

  • The maximum property value is $1 MM. Any property purchased above $1 MM must have at least 20% down payment.
  • Double approval - The insurer must approve the underwriting of the loan in addition to the lender. There are times when the lender will approve it but not the Insurer.
  • The maximum amortization for insured mortgage is 25 years.
  • Insurance premiums are added to the mortgage balance and thus amortized over time.

Insurance Premiums:

Lenders and the Insurers look at the Loan-to-Value (LTV) which is simply the reciprocal of the down payment percentage. For example, 5% down payment is a 95% Loan to Value.

Value is important! If an appraisal is required and the value comes in lower then more down payment may be required.

Loan to Value

Premium

80% or less

3.60%

80.01% to 85%

1.80%

85.01% to 90%

2.40%

90.01% to 95%

3.60%

 

Example to Illustrate

Let’s assume a couple are purchasing an $800,000 home and want to put down the minimum down payment.

Step 1 – calculate the down payment

$25,000 = First $500K x 5%
$30,000 = Amount above $500K = $300K x 10%
----------
$55,000 = Minimum Down Payment

Step 2 - calculate the mortgage amount:

$800,000 Purchase Price
$55,000 Down Payment
----------
$745,000 mortgage amount

Step 3 – calculate the Loan-to-Value and look up the premium

LTV = 745,000 / 800,000 = 93.1%

Premium = 3.60%

Step 4 – calculate the premium

Mortgage amount x Premium Rate = Premium

745,000 x 3.6% = $26,820
Total mortgage amoun

t = $745,000 + $26,820 = $771,820

In this example, the borrowers will incur higher monthly mortgage payments of $120.14 assuming a rate of 2.5% and a 25-year amortization.

 

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