What Is Mortgage Insurance and How Does It Work?

Buying a home is a major milestone — and for many, it involves navigating new financial concepts. One of the most commonly misunderstood is mortgage insurance. It sounds like something that protects you, but in most cases, it protects the lender. So why is it required, and how does it work?

This becomes especially important if you are making a down payment of less than 20 percent, or if you are applying for a mortgage with a high loan-to-value ratio. Understanding what mortgage insurance does helps you plan your home purchase more effectively and avoid surprises during the approval process.

What Is Mortgage Insurance?

Mortgage insurance is a policy that protects the lender in case the borrower defaults on the loan. It does not insure your property, your ability to make payments, or your life. Instead, it allows lenders to approve loans that might otherwise be considered too risky.

In Canada, mortgage default insurance is mandatory for most buyers who put down less than 20 percent. This is commonly provided through the Canada Mortgage and Housing Corporation (CMHC) or private insurers like Sagen or Canada Guaranty.

By transferring some of the risk to an insurer, lenders can offer better rates and more accessible borrowing terms, even when your down payment is low.

How Does It Work?

If your down payment is under 20 percent, your lender will arrange mortgage insurance on your behalf as part of the loan approval process. The premium is usually based on the size of your down payment and the total mortgage amount.

The cost of the insurance premium can be:

• Added to your mortgage and paid over time

• Paid as a lump sum at closing (less common)

Here’s a simplified breakdown of how premiums are typically calculated:

The higher your down payment, the lower your premium rate. For example, a $400,000 mortgage with a 10 percent down payment might have a premium of $12,400 (3.10 percent), which could be added to the loan balance.

Who Pays for Mortgage Insurance?

Although mortgage insurance protects the lender, the cost is paid by you, the borrower. It is not optional if your down payment is below 20 percent on a high-ratio mortgage. However, the insurance helps make homeownership more accessible by allowing lower upfront costs.

You might choose to increase your down payment to avoid paying this insurance, but for many first-time buyers, the tradeoff is worthwhile in order to enter the housing market sooner.

When Does It End?

Mortgage insurance is typically required only for high-ratio mortgages. Once your loan is approved and the premium is paid, the insurance remains in place for the life of that mortgage. You cannot cancel it early just because your home equity grows.

However, if you refinance or switch lenders in the future, you may no longer need insurance if your loan-to-value ratio has improved.

For conventional mortgages (those with 20 percent or more down), insurance is usually not required — though some lenders may still request it in certain situations, such as self-employed income or less traditional credit history.

When Does Mortgage Insurance Make Sense?

You might consider accepting mortgage insurance if:

• You want to buy a home now but do not have a 20 percent down payment

• You qualify for a favorable interest rate and the insurance enables approval

• You are entering the market in a rising real estate environment

• You are confident in your ability to repay the loan and want to begin building equity sooner

Rather than waiting to save a larger down payment, mortgage insurance may be the tool that helps you secure a home when prices are rising faster than your savings.

Having a clear understanding of how it works can help you assess whether it is a good strategic fit for your purchase plan and long-term financial goals.