Insured vs. Uninsured: Understanding CMHC in Ontario

In Ontario, the size of your down payment determines whether your mortgage is 'insured' or 'uninsured.' If you put down between 5% and 19.99%, you are required by law to purchase mortgage default insurance through a provider like CMHC, Sagen, or Canada Guaranty. This insurance protects the lender—not you—in case you default on your payments. Paradoxically, because the lender's risk is lower with this insurance, the interest rates for insured mortgages are often lower than for those with a full 20% down payment. It is the only time in the financial world where having less equity can actually get you a better rate.

Uninsured mortgages are those where the borrower has at least a 20% down payment. While you avoid the one-time insurance premium, which is added to your mortgage balance, your interest rate is usually slightly higher because the bank is taking on the risk themselves. However, uninsured mortgages offer more flexibility; for instance, you can choose a 30-year amortization period to lower your monthly payments, whereas insured mortgages are capped at 25 years (with some recent exceptions for first-time buyers of new construction). Choosing between the two isn't just about the rate—it's about the monthly cash flow and the total cost of borrowing.

One critical Ontario-specific detail is the 8% PST on the insurance premium. While the CMHC premium itself is rolled into your mortgage, the provincial sales tax on that premium must be paid in cash at the time of closing through your lawyer. For a $500,000 mortgage with 5% down, the premium might be around $20,000, meaning you need to have an extra $1,600 in cash ready for the tax. This is a common 'hidden cost' that catches many first-time buyers in the GTA by surprise. Factoring this into your closing cost budget from the beginning is essential to avoid a last-minute scramble.

I recommend that if you have 20% available, we look at the 'break-even' point between taking a slightly higher rate versus paying the insurance premium for a lower rate. Sometimes, staying just under 20% and paying the premium is actually cheaper over a five-year term if the rate spread is wide enough. Alternatively, if you are looking to maximize your budget in an expensive market like Brampton, going with a 35% down payment often unlocks 'insurable' rates through back-end insurance, giving you the best of both worlds. Let's run the numbers for your specific situation to see which down payment strategy saves you the most money.