Which scenario would typically require mortgage default insurance in Canada?

Q: What is the correct answer to: Which scenario would typically require mortgage default insurance in Canada?

The correct answer is Purchase price $400,000 with $60,000 down payment. Option C requires mortgage default insurance because the down payment represents only 15% of the purchase price ($60,000 ÷ $400,000 = 15%). Under Canadian federal regulations administered by OSFI, mortgage default insurance is mandatory when the down payment is less than 20% of the property's purchase price. This creates a loan-to-value ratio of 85%, which exceeds the 80% threshold where insurance becomes required. The insurance protects the lender against potential losses from borrower default on high-ratio mortgages.

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

Mortgage default insurance in Canada is governed by federal regulations through OSFI and is mandatory for high-ratio mortgages where the loan-to-value exceeds 80% (down payment less than 20%). The insurance is provided by CMHC (government), Genworth Canada, or Canada Guaranty (private insurers). Premium rates vary based on LTV ratio and amortization period, typically ranging from 0.6% to 4.5% of the mortgage amount. The insurance protects lenders, not borrowers, against default losses. For properties over $1 million, minimum down payment requirements increase to 20% for the portion above $500,000. Investment properties require minimum 20% down regardless of value, making them ineligible for insured mortgages.

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

Think of 20% as the 'insurance line' - anything below this line requires insurance protection. Visualize a horizontal line at 20% on a graph. Any down payment that falls below this line (like diving underwater) needs the 'life jacket' of mortgage insurance to keep the lender safe from drowning in potential losses. When you see mortgage insurance questions, immediately calculate the down payment percentage. If it's below 20%, insurance is required. If it's 20% or above, no insurance needed. Draw a mental line at 20% and see which side the scenario falls on.

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

Quickly calculate down payment percentage by dividing down payment by purchase price. If less than 20%, insurance is required. Focus on the math first, then apply the rule.

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

A first-time homebuyer couple finds a $450,000 condo and has saved $50,000 for a down payment (11.1%). Their mortgage broker explains they'll need mortgage default insurance, adding approximately $16,000 to their mortgage amount in premiums. The broker helps them understand this enables homeownership now rather than waiting years to save a full 20% down payment, but increases their monthly payments and total borrowing costs over the mortgage term.

Question

Mortgage & Real Estate FinanceMortgage Insurance RequirementsMEDIUM

Which scenario would typically require mortgage default insurance in Canada?

Answer Options

A

Purchase price $600,000 with $150,000 down payment

B

Purchase price $500,000 with $125,000 down payment

C

Purchase price $400,000 with $60,000 down payment

D

Refinancing an existing mortgage at 75% loan-to-value