Mortgage default insurance, commonly known as, is a basic requirement in home-ownership in Canada for down payments between 5%-19.99%. This protects lenders in cases that the homeowner fails to pay for or defaults on their mortgage. Insurance is required due to the small ratio of the equity you are able to put up for your home.


Mortgage default insurance is provided by Canada Mortgage and Housing Corporation (CMHC) as well as other financial institutions such as Genworth Financial and Canada Guaranty Mortgage Insurance.


How to calculate your insurance premium?


For example you want to purchase a $400,000 home and you use $35,000 as your down payment.

You also choose a 25-year amortization period. So your insurance premium would be calculated like this:


Step 1: Determine the % of the down payment from the home price.


$35,000 / $400,000 = 8.75%


Step 2: Refer to this table to see how much the insurance premium percentage.


Down Payment in %

Amortization

period

5% - 9.99%

10% - 14.99%

15%-19.99%

20% or higher

25 years or less

2.75%

2.00%

1.75%

0.00%


 


Step 3: Get the mortgage amount ($400,000 - $35,000 = $365,000)


Step 4: Calculate your insurance amount by multiplying the mortgage amount by the insurance premium percentage ($ 365,000 * 2.75% = $10,037.50).


Step 5: Add up the insurance premium to the original mortgage amount to come up with a new mortgage amount. ( $ 365,000 + $10,037.50 = $375,037.50).


This new mortgage amount will now divided into monthly installments. Therefore, unlike other costs, your insurance premium incorporated on your amortization, not paid in lump sum.


What increases your insurance premium?


There are different calculations for other homebuyers with:


1.  Non-traditional sources of down payment. If your down payment was derived from loans from non-family members or friends.


2. Those who are self-employed or non-verified income. Self-employed home-buyers who cannot come up with an income validation are required even higher down payment and insurance premium compared to standard mortgage loan applicants.


So aside from building a stable income to avoid such increase; the only way to decrease your insurance premium is to increase your down payment. You can do so in two ways: either you increase the percentage of the down payment to the value of the property by raising more funds; or use the same down payment amount you already raised to purchase a property that is less-expensive.

 

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