Default insurance

Definition

Insurance required when the down payment is less than 20% of the price. It protects the lender, not you, in case of default, and you pay the premium. In Canada it is offered by CMHC, Sagen, and Canada Guaranty. The premium depends on the loan-to-value ratio: at the time of writing, about 2.8% of the loan at 90% financing and 4% at 95%. Example: a $450,000 house with 5% down, or $22,500. The loan is $427,500, a premium of about $17,100 is added to the loan, and Quebec sales tax on that premium, about $1,540, is paid in cash at closing. An insured loan gives access to the best rates but imposes a maximum price, a capped amortization, and the stress test.