High Ratio Mortgage Insurance

When you buy a house in Ontario, one of the costs that you are required to have on hand is a down payment. According to the Canada Mortgage and Housing Corporation (CMHC), the minimum down payment required is 5% of the total cost of the house, but you can choose to put down as much as you feel comfortable with on top of that number.  That being said, if you put down less than 20% you are required to purchase high ratio mortgage insurance.

What is high ratio mortgage insurance? High ratio mortgage insurance, also known as default mortgage insurance, offers protection to the lender in case a homeowner defaults on their mortgage.

How is high ratio mortgage insurance calculated? To find out what your premium would be you first have to calculate your mortgage amount (house cost minus your down payment). Then you have to determine the percentage of your down payment (down payment divided by house cost). Once you have your percentage you can determine your high ratio mortgage insurance premium. You then multiply the mortgage amount by the premium to get your insurance cost.

Premiums:

5 – 9.99% = 2.75%

10 – 14.99% = 2%

15 – 19.99% = 1.75%

20% and up = 0%

Example:

Home Price: $350,000
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Down Payment: $25,000

Mortgage Amount: $325,000

Insurance Cost: $8,938

New Mortgage Amount: $333,938

Down Payment Percentage: 7.14% (Premium = 2.75%)

How is high ratio mortgage insurance paid? Unlike the other closing costs associated with purchasing a house, your mortgage insurance in added on to the total amount of your mortgage and your monthly mortgage payment increases accordingly.

As mentioned, by law CMHC requires this premium to be paid whenever a down payment is less than 20%. The only way to decrease (or eliminate) your CMHC mortgage insurance cost is to increase your down payment.  For example, in order to save on CMHC mortgage insurance, the down payment on the above example would have to be $70,000 (20%).