Which type of mortgage insurance is required when a borrower has a down payment of less than 20%?

Q: What is the correct answer to: Which type of mortgage insurance is required when a borrower has a down payment of less than 20%?

The correct answer is Mortgage default insurance. Mortgage default insurance is mandated by federal regulation when the loan-to-value ratio exceeds 80% (down payment less than 20%). This insurance protects lenders against borrower default and is provided exclusively by three federally approved insurers: CMHC, Genworth Canada, and Canada Guaranty. The insurance premium is typically added to the mortgage amount or paid upfront, and this requirement is non-negotiable for high-ratio mortgages in Canada's regulated lending environment.

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

Canadian mortgage regulations establish the 20% down payment threshold as the dividing line between conventional and high-ratio mortgages. High-ratio mortgages (LTV above 80%) must be insured through federally approved mortgage insurers. This system emerged from lessons learned in housing market downturns where high LTV loans posed systemic risks. The insurance premium ranges from 0.6% to 4.5% of the mortgage amount, depending on LTV ratio and other factors. CMHC, as a Crown corporation, dominates this market alongside private insurers Genworth Canada and Canada Guaranty, all operating under federal oversight.

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

Think of the 20% down payment as a 'shield' protecting lenders. Below this shield (less than 20% down), lenders are exposed and need 'DEFAULT insurance' as backup protection. The word 'DEFAULT' reminds you it's specifically about payment default risk, not life, property, or title issues. When you see questions about required insurance with down payments below 20%, immediately think 'DEFAULT shield activated' - this triggers the need for mortgage DEFAULT insurance, not other types of insurance coverage.

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

Look for the 20% down payment threshold in questions. Below 20% always means mortgage default insurance is required. Don't confuse with optional insurances like mortgage life insurance or standard property insurance requirements.

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

Sarah wants to buy a $500,000 home with a $75,000 down payment (15%). Her mortgage broker explains that because her down payment is below 20%, she must obtain mortgage default insurance through CMHC, Genworth, or Canada Guaranty. The insurance premium of approximately $19,000 can be added to her mortgage or paid upfront. This insurance protects her lender if she defaults, but allows her to purchase with a smaller down payment than the conventional 20% requirement.

Question

Mortgage & Real Estate FinanceMortgage InsuranceEASY

Which type of mortgage insurance is required when a borrower has a down payment of less than 20%?

Answer Options

A

Mortgage life insurance

B

Mortgage default insurance

C

Property insurance

D

Title insurance