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Mortgage default insurance: What homebuyers need to know

Are you looking to buy a home? The good news is that interest rates remain at their lowest since 2010. On the other hand, the market is more competitive than ever, and so housing prices across Canada also keep climbing.

Over the past several years, the federal government has been tightening mortgage rules to try to ensure Canadians don’t take on too much debt, including the mortgage stress test.

The Canada Mortgage and Housing Corporation (CMHC) had also tightened its mortgage default insurance rules in July 2020, but reversed its decision a year later. The gross debt-service ratio (housing costs as a percentage of your gross monthly income) is back to 39% and the total debt-service ratio (housing costs and other debts as a percentage of your gross monthly income) is 44%. At least one borrower will need a minimum credit score of 600.

If you’re in the market for a home, here’s what you need to know about down payment requirements and mortgage default insurance.

1. How big a down payment do you need?

Many people take out a mortgage — essentially a loan — when they purchase a home. But you can’t borrow 100% of your home’s value. You must pay down at least 5% for the first $500,000 of the purchase price and 10% for the portion of the price above $500,000 (for properties up to $1 million). For homes above $1 million, you need a minimum down payment of 20%.

2. What is mortgage default insurance?

If you’ve met the minimum down payment requirements but have less than 20%, you’ll have to get mortgage default insurance. This could cost between 2.8% to 4.0% of your mortgage, plus tax. This amount can be added to your mortgage payments. Mortgage default insurance protects your lender (not you) against the risk of you defaulting.

3. Who provides mortgage default insurance?

The major mortgage insurer in the country is CMHC, owned by the federal government. Sagen and Canada Guaranty Mortgage Insurance Company are two private residential mortgage insurers.

4. Is mortgage default insurance mandatory?

Yes, if your down payment is less than 20%, mortgage default insurance is mandatory. Lenders won’t approve your mortgage without it. Since homes above $1 million require a 20% down payment as the minimum, you would not need mortgage default insurance in those cases.

Flowchart illustrates the scenarios where mortgage default insurance will or will not be needed

 

Does buying a home make sense for you?

Check out MD Financial Management’s mortgage calculator to get an idea of monthly mortgage payments if you buy a home. Change variables like your down payment, the interest rate and the home price to see the impact on your payments.

MD Financial Management’s rent or buy calculator factors in much more than the mortgage, to help you see what would make sense for your current situation.

Use the Scotiabank eHOME online mortgage hub to get pre-approved, search for a home and get a mortgage approval all in one place, all online. For residents, fellows and new-to-practice physicians, the mortgage amount qualified for is based on estimated projected income.1  

An MD Advisor* can help you with your budget and help determine how a mortgage will fit into your financial plan.

*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 The projected income is an average estimated amount based on available industry data and is subject to change. Your actual income may vary. Terms and conditions apply.

All banking and credit products and services are offered by The Bank of Nova Scotia (“Scotiabank”).  ® Registered trademarks of The Bank of Nova Scotia, used under licence. Visit scotiabank.com.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.