Mortgage Insurance (Default Insurance)
When you purchase a home in Canada with less than 20% down through an institutional lender, you will have to get default insurance; your loan will be insured through CMHC (Canadian Mortgage and Housing Corp.), Genworth Financial Canada or Canada Guaranty Mortgage Insurance Company (unless the loan is a sub-prime loan). The role of the insurer is to guarantee the loan so the bank/lender is protected from default. The simplest way to explain this is an example: if you wanted to borrow 95% of the value of a home, no bank would lend it to you; the loan is too high risk. However once the lender has the backing of an insurer they are no longer at risk so they will be more comfortable lending you the money. The whole concept behind mortgage insurance is to get more Canadians into owning their own homes.
The percentage of the insurance premium varies depending on a number of factors; down payment, program needed and length of amortization. The insurers review the risk they would be exposed to by the loan and then price the insurance accordingly based their set programs. For example if you are purchasing with 5% down and you have a salaried position, your insurance would be 2.75% of the mortgage amount (with a 25 year amortization). If you are self employed and you need a stated income product (don't show enough income on paper), your insurance would be much higher even with the required 10% down.
Generally most new home buyers opt to add the insurance on to their mortgage; however you can pay for it up front if you choose. The best way to think of mortgage insurance is as a necessary evil; everyone with less than 20% down payment has to pay it. Understanding the role of mortgage insurance and the benefit it provides all homeowners, makes it a little easier to accept however.
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