CMHC stands for Canada Mortgage and Housing Corporation — a crown corporation that default insures most of Canada’s prime mortgages. There are 2 other mortgage default insurance providers though they are privately owned: Sagen and Canada Guaranty.
Mortgage Default Insurance protects the lender in case the borrower defaults – unable to pay their mortgage. The cost of default insurance ranges between 2.8% to 4% of the mortgaged amount. This cost can be paid in cash or added to your mortgage balance – upon qualification, as the total mortgage you can carry still needs to meet certain criteria.
An insured mortgage is qualified as such when your down payment is less than 20%. Therefore, you will need to purchase default (high ratio) insurance. Although this insurance is added to your mortgage, the taxes (PST) on purchasing this insurance are not.
Your solicitor will collect and remit the PST on behalf of the high ratio insurer (CMHC, Sagen or Canada Guaranty) upon your closing. Once the high ratio insurance is purchased from one of the three default insurers, the risk to the lender is reduced as the default insurance will protect them in case of default.