How is the mortgage loan insurance premium calculated?

The loan-to-value ratio, the starting point

The loan-to-value ratio compares the loan with the property's value. You calculate it by dividing the amount borrowed by the purchase price or the appraised value, depending on the lender's method. Ask which one applies. A 5% down payment gives a 95% ratio, and a 20% down payment gives an 80% ratio. Each ratio band corresponds to a premium rate. The premium applies to the total loan, not only to the portion above 80%. A small change in the down payment can move the file into a higher or lower band and change the premium noticeably. Check your ratio before setting the down payment, rather than after the purchase offer.

CMHC's table for a standard purchase

According to CMHC, for a standard purchase loan, the premium is as follows, as a percentage of the loan: 0.60% if the ratio is 65% or less, 1.70% up to 75%, 2.40% up to 80%, 2.80% up to 85%, 3.10% up to 90%, and 4.00% up to 95%, for a traditional source of down payment. The page specifies that the premium may be reduced for a transferred insurance policy or an energy-efficient purchase, and that the exact amount is calculated at application. Other insurers have their own tables. Other situations, such as a refinance or a rental building, follow other tables. This table applies to a standard purchase only.

Minimum down payment and maximum insurable price

According to CMHC, insurance is available only if the purchase price is below $1,500,000. The minimum down payment is 5% for a price up to $500,000. Above that, it is 5% of the first $500,000 plus 10% of the portion above. If the down payment reaches 20% or more, insurance is generally not required, and the lender applies its own rules. These thresholds are set by the rules in force and may evolve. The down payment must come from funds whose origin can be documented, as the article on permitted sources explains. Confirm the requirements with the professional handling your file before setting a target price.

Quebec sales tax and adding the premium to the loan

You can generally pay the premium in one payment, or add it to the loan and include it in the instalments. In the second case, you pay interest on the premium over the loan's term, which increases the total cost. In Quebec, according to the Financial Consumer Agency of Canada, the sales tax on the premium cannot be added to the mortgage. It is paid in cash, usually at closing. This amount adds to transaction costs. Plan for it in your cash pool, separate from the down payment. Ask the lender or broker for the exact amount of this tax, since it depends on the premium calculated for your file.

Measuring the effect on total cost

Comparing two down payments on the premium alone is misleading. A larger down payment reduces the loan, the premium and the interest, but also lowers cash after the purchase. A premium added to the loan increases the balance to amortize, and therefore the payment. Use the QuebecTaux calculator to test several ratios and compare the payment with and without the premium added. Results are informational only, not an approval or a rate offer. Avoid cutting the target price or the reserve just to cross a ratio threshold without measuring what you give up. A broker can compare different insurers and the uninsured option, depending on your profile.

Checklist

• ✓Calculate the loan-to-value ratio for each down payment scenario
• ✓Ask the lender how the reference value is established
• ✓Check CMHC's current premium table before budgeting
• ✓Verify that the purchase price is under the insurable ceiling
• ✓Calculate the minimum down payment for the target price
• ✓Plan cash for the sales tax on the premium in Quebec
• ✓Compare the payment with and without the premium added to the loan
• ✓Keep a cash buffer after the down payment
• ✓Ask a broker to compare insurers and options