What is mortgage default insurance and who does it protect?
It protects the lender, not you. It is required below twenty percent down, the premium is added to your mortgage, and in Ontario the retail sales tax on that premium is cash you pay on closing.
If you default, the insurer pays the lender. You still lose the house. The benefit to you is indirect: because the lender's risk is covered, insured mortgages are priced lower than uninsured ones and are available with a much smaller down payment.
The premium is a percentage of the loan that rises as your down payment shrinks, and it is capitalized, meaning added to the balance and paid off with interest over the amortization. There are surcharges for amortizations beyond twenty-five years and for a borrowed down payment.
Ontario charges retail sales tax on the premium under the Retail Sales Tax Act, and that tax cannot be added to the loan. It is due in cash on closing, and it is the line item buyers most often discover late. There is also a maximum purchase price above which insurance simply is not available, which is what makes twenty percent a hard floor at higher prices.
The tax is often called PST out of habit. Ontario's retail sales tax was replaced by the HST in 2010 for most things, but it survives on insurance premiums, which is why this one line looks like a tax that no longer exists.
Answer it with your own numbers
You will need: purchase price, down payment, amortization.
See your premium and the tax on itAlso asked as
- What is CMHC insurance?
- Do I have to pay CMHC?
Next questions
How much do I need for a down payment?
The minimum is tiered: five percent on the first portion of the price, ten percent on the portion above it, and twenty percent once the price passes the insurable cap. The calculator gives you the exact figure for your price.
Canada-wide
Why do I have to pay sales tax on my mortgage insurance in cash?
Because Ontario taxes the insurance premium, and while the premium itself is added to your mortgage, the tax on it cannot be. It is due in cash on closing and it is the line buyers most often discover late.
Ontario
Is putting twenty percent down always better?
No. Twenty percent avoids the insurance premium and its sales tax, but insured mortgages are often priced below uninsured ones, and draining your reserve to reach twenty percent is a trade you should price rather than assume.
Canada-wide