Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt. Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price. In this example, what signal do potential homeowners give to indicate they are low-risk?

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Having a large down payment indicates that the potential homeowner has already saved a substantial amount and is less likely to default on the loan. This reduces the lender's risk and the need for mortgage insurance.

Mortgage Insurance Protects Lenders When a Borrower Defaults by Making