Mortgage default insurance in Canada is required when you buy a home with a down payment below 20%, and it protects the lender if you default - not you. This guide explains who needs it, how premiums work, and how a co-signer changes the picture.
Mortgage default insurance in Canada - often simply called mortgage insurance - is a policy that protects your lender if you stop making payments on a high-ratio mortgage. It is required when your down payment is less than 20% of the home's purchase price, and it is paid for by you, the borrower, but the payout goes to the lender. This guide explains who needs it, how it works, how it affects a co-signer, and why it is not the same as mortgage life insurance.
| Type of insurance | Who it protects | Who pays | Is it required? |
|---|---|---|---|
| Mortgage default insurance | The lender | Borrower (added to mortgage or paid upfront) | Yes, for down payments under 20% (with exceptions) |
| Mortgage life insurance | You or your family | Borrower (optional premium) | No |
| Creditor insurance (disability, job loss) | Lender or you depending on policy | Borrower (optional) | No |
| Title insurance | You and the lender | Borrower (one-time or premium) | Often required by lender |
What mortgage default insurance actually is
Mortgage default insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), a Crown corporation, or by private insurers such as Sagen and Canada Guaranty. These insurers back the lender's risk. If you default and the lender loses money after selling the home, the insurer compensates the lender for the shortfall, up to the coverage limit.
The premium is calculated as a percentage of the mortgage amount. It varies by loan-to-value ratio and amortization. You do not write a separate cheque to the insurer; instead, the premium is usually added to your mortgage balance, so you pay interest on it over the life of the loan. That means the cost compounds. CMHC publishes its premium rates and eligibility rules.
Because it protects the lender, mortgage default insurance does not pay you anything if you lose your job or become ill. It does not cover your payments. It only compensates the lender after a default and a forced sale. This is the single most misunderstood point: borrowers often think they are insured, but they are not the beneficiary.
Who needs mortgage default insurance in Canada
You generally need mortgage default insurance if your down payment is less than 20% of the home's value. These are called high-ratio mortgages. If your down payment is 20% or more, you have a conventional mortgage, and default insurance is not required. However, some lenders may still choose to insure conventional mortgages through portfolio insurance, but that is the lender's decision and cost.
There are other limits. The property must be in Canada and meet the insurer's criteria. The purchase price cannot exceed the insurer's maximum, and the borrower must have a minimum credit score and stable income. The Federal Consumer Agency of Canada (FCAC) explains mortgage rules on its mortgages page.
If you are self-employed or have non-traditional income, you may need to provide more documentation. Insurers also look at your total debt ratios. A co-signer can help you meet those ratios because their income and credit history are considered alongside yours.
It protects the lender, not you - here's what that means
When you default, the lender can sell the home through a power of sale or foreclosure. If the sale proceeds are less than what you owe (including fees and penalties), the lender claims the difference from the insurer. The insurer then has the right to pursue you for that amount. So the insurance does not erase your debt; it protects the lender's balance sheet. You remain liable for any shortfall.
This is why the Canada Mortgage and Housing Corporation can say that mortgage default insurance "protects the lender against borrower default." The FCAC notes that you remain responsible for your mortgage payments even with insurance. FCAC loans page has more on your rights and responsibilities.
What does it mean for you? It means you still need emergency savings, disability insurance, or life insurance if you want personal protection. Default insurance is not a safety net for you. It is a requirement that lets you buy with a smaller down payment.
How a co-signer interacts with mortgage default insurance
A co-signer is someone who agrees to be responsible for the mortgage if you cannot pay. On a mortgage application, the lender will consider the co-signer's income, credit score, and debts. This can help you qualify for a larger mortgage or a better rate. But does a co-signer change whether you need default insurance? No. The down payment threshold still applies. If your down payment is under 20%, the lender will still require default insurance, and the co-signer does not remove that requirement.
However, a co-signer can affect the premium indirectly. If the co-signer's strong credit profile helps you get approved at a lower loan-to-value ratio - for example, by increasing the down payment - you might avoid default insurance altogether. But if the co-signer simply adds income so you can afford a larger mortgage with a small down payment, the insurance premium will be based on the total mortgage amount, which is now larger. So the cost of default insurance can increase.
Also, because the co-signer is on title or on the mortgage, they are equally liable. If you default and the insurer pays the lender, the insurer can pursue both you and the co-signer for the shortfall. Joining a mortgage as a co-signer is a serious commitment. Learn more in our guide on what it means to be a co-signer.
One more point: if the co-signer is not on title but only on the mortgage, some lenders treat them as a guarantor rather than a co-signer. The legal difference matters for enforcement and for how the insurance claim works. The insurer's right to recover is not limited to the borrower who lives in the home; it can extend to anyone who signed the mortgage documents.
What about mortgage life insurance and other add-ons?
Mortgage default insurance is not mortgage life insurance. Mortgage life insurance is optional and pays off your mortgage if you die. The beneficiary is your lender or your estate, depending on the policy. It protects you or your family, not the lender's default risk (though the lender benefits by being paid). Creditor insurance for disability or job loss is another optional product. These are sold by lenders and insurers, and they are not required for a high-ratio mortgage.
You may also be offered title insurance. Title insurance protects against defects in the title, such as fraud or unpaid liens. It is often required by lenders but is a one-time or annual premium, and it is not the same as default insurance. Do not confuse the three.
If you are considering optional insurance, compare the cost and coverage carefully. The FCAC has a loans section that explains your rights when buying insurance products from a lender. Also note that some provincial regulators, such as the Office of the Superintendent of Financial Institutions (OSFI) at the federal level for banks, oversee how these products are sold. OSFI publishes guidelines for lenders.
Common mistakes to avoid with mortgage default insurance
- Thinking the insurance covers you. It does not. You still owe the debt if you default.
- Forgetting that the premium is added to your mortgage and accrues interest. A 3% premium on a $500,000 mortgage adds $15,000 to your balance, and you pay interest on that amount for years.
- Assuming a co-signer removes the need for default insurance. It does not; only a down payment of 20% or more typically does.
- Not shopping around for a lender that offers different premium rates. While the insurers set base rates, lenders may have different arrangements. Compare your options.
- Confusing default insurance with mortgage life insurance. They are different products with different beneficiaries.
- Ignoring the total cost of borrowing. Use a loan payment calculator to see how the added premium affects your monthly payments.
Who this suits
Mortgage default insurance is designed for buyers who have a down payment between 5% and 19.99% of the home price. It allows them to enter the housing market sooner. If you have a larger down payment, you avoid the premium and the extra interest cost. For those with a smaller down payment, the trade-off is paying for insurance that protects the lender, but gaining access to homeownership. A co-signer can help you qualify, but it does not change the insurance requirement. If you have bad credit, some lenders may require a co-signer or a larger down payment; see our guide on bad credit loans for more on how credit affects borrowing.
Before you sign, review the mortgage documents carefully. Ask your lender to explain the default insurance premium and whether it is added to your mortgage or paid upfront. Understand that the insurer may have recourse to you and your co-signer if there is a shortfall. This is not a decision to take lightly. For official information, start with the FCAC mortgages page.