Mortgage insurance in Canada is a type of insurance that protects the lender, not the borrower, in case of default on the mortgage. If you're buying a home with less than a 20% down payment, mortgage insurance is mandatory and is provided by one of three insurers: CMHC, Sagen, or Canada Guaranty. The insurance allows you to secure a mortgage with a smaller down payment, which can make homeownership more accessible. The cost of the insurance premium is added to your mortgage and paid off over the life of the loan, though it can be paid upfront if preferred. It's important to understand that while mortgage insurance enables you to buy a home with less money down, it doesn't protect you if you're unable to make payments. Instead, it mitigates the lender's risk in lending to you, which is why they are willing to offer you a mortgage with a lower down payment, and typically with a lower interest rate. This insurance shouldn't be confused with mortgage life insurance, which is a separate product designed to pay off your mortgage if you pass away.
Lenders realize that if they have to foreclose on a property they will get 80% of the value of that property, best case. Mortgage insurance is something the borrower buys for the lender that protects the lender against a loss if you put less than a 20% down payment. That way, the lender feels confident in making a loan with a lower down payment that would otherwise be seen as to risky.
When explaining mortgage insurance to clients, I start by outlining the different types of insurance associated with a mortgage. I then go into further detail on each one, covering what they protect, what they don’t, the costs involved, and whether they are mandatory or optional. The four main types of insurance I discuss are: default insurance (if applicable), title insurance, life and disability insurance, and homeowners insurance.