A client is purchasing a $600,000 home in Alberta with a 10% down payment. What additional cost will they need to pay for mortgage default insurance?

Q: What is the correct answer to: A client is purchasing a $600,000 home in Alberta with a 10% down payment. What additional cost will they need to pay for mortgage default insurance?

The correct answer is 2.40% of the mortgage amount. Option B is correct because a 90% loan-to-value ratio (10% down payment) falls into the CMHC insurance premium tier of 2.40% of the mortgage amount. This is the standard rate established by CMHC for mortgages with LTV ratios between 85.01% and 90%. The premium is calculated on the mortgage amount ($540,000), not the purchase price, making the insurance cost $12,960 ($540,000 × 2.40%).

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage default insurance in Canada is mandatory for high-ratio mortgages (LTV above 80%) and is provided by CMHC, Genworth, or Canada Guaranty. Premium rates are tiered: 80.01-85% LTV = 1.75%, 85.01-90% LTV = 2.40%, 90.01-95% LTV = 3.10%, and 95.01-95% LTV = 4.00%. The insurance protects lenders, not borrowers, against default risk. Premiums can be paid upfront or added to the mortgage principal. This system enables homeownership with lower down payments while managing lender risk.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Picture climbing a ladder where each rung represents higher risk and cost: 80-85% = 1.75% (first rung), 85-90% = 2.40% (second rung), 90-95% = 3.10% (third rung), 95%+ = 4.00% (top rung). The higher you climb (higher LTV), the more expensive it gets. When you see an LTV ratio question, visualize which rung of the ladder the client is on. 10% down = 90% LTV = second rung = 2.40%. Count the rungs to find the premium rate.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

Always calculate LTV first: (Purchase Price - Down Payment) ÷ Purchase Price. Then match to the premium tiers: 80-85% = 1.75%, 85-90% = 2.40%, 90-95% = 3.10%, 95%+ = 4.00%.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

Sarah wants to buy a $500,000 condo in Calgary with $50,000 down (10%). As her realtor, you calculate her 90% LTV ratio and explain she'll need CMHC insurance at 2.40% of her $450,000 mortgage ($10,800). You help her understand this can be added to her mortgage or paid upfront, affecting her monthly payments and total borrowing capacity for qualification purposes.

Question

Mortgage & Real Estate FinanceMortgage InsuranceABMEDIUM

A client is purchasing a $600,000 home in Alberta with a 10% down payment. What additional cost will they need to pay for mortgage default insurance?

Answer Options

A

1.75% of the mortgage amount

B

2.40% of the mortgage amount

C

3.10% of the mortgage amount

D

4.00% of the mortgage amount