The CMHC (Canada Mortgage and Housing Corporation) is currently the largest mortgage insurer in Canada, acting as Canada’s national housing authority. They are a government agency known for connecting Canadians with affordable housing options. On top of providing mortgage loan insurance, the CMHC also provides a number of other tools for financial management and mortgage assistance. These include payment deferrals, repayment period extensions, missed mortgage payment blending, and transitions from variable rate to fixed-rate mortgages.
When you purchase a property as a homebuyer, you are legally required to put down a down payment. A down payment is a portion of the purchase price that you are paying upfront. The minimum value of your down payment can be as low as 5 per cent and will vary based on the purchase price of your home. In Canada, if the value of your down payment makes up less than 20 per cent of your property purchase price, you will be legally required to purchase mortgage loan insurance (also known as mortgage default insurance) and pay a fee called an insurance premium. CMHC mortgage loan insurance is the most common mortgage loan insurance in Canada, although others such as Sagen, formerly Genworth Financial, and Canada Guaranty Mortgage Insurance Company are two other providers.
The total value of your CMHC mortgage insurance premium can range from 0.6 per cent to 4.5 per cent of your mortgage, depending on the size of your down payment. The bigger you make your down payment, the smaller your premium will be. You can pay this premium up-front, as a lump sum, or by splitting it up and adding it to your existing monthly mortgage payments. Keep in mind that if you add your premium payments into your mortgage, you will also need to apply the mortgage interest rate to the premium, costing you more in the long run. Whether you pay your premium as a lump sum or add it to your mortgage, it will be subject to provincial sales tax in Ontario, Quebec, Saskatchewan and/or Manitoba. In Ontario, the HST (13%) on mortgage default insurance is due upfront upon closing.
The purpose of mortgage loan insurance is to protect your lender in the event that you fail to make your monthly mortgage payments and default on your mortgage. In order to prevent losses, lenders purchase insurance for their mortgage loans and then pass these costs off onto the borrower.
Many financial institutions in Canada cannot provide mortgages that exceed 80 per cent of the purchase price. If your down payment falls below 20 per cent of your purchase price, it will push your mortgage outside the established limits of a conventional mortgage and will then push your mortgage into the high-ratio category. This tends to make your mortgage a more moderate or high risk for most any lender. CMHC mortgage loan insurance can help protect a lender’s interests in such transactions.
CMHC mortgage loan insurance is usually only required if your down payment makes up less than 20 per cent of your property’s purchase price. However, you may be required to purchase mortgage default insurance even if your down payment exceeds the 20 per cent minimum. If you have a poor credit score or an inconsistent, unreliable, or less traditional source of income, your lender may require you to insure your mortgage before working with you.
There are also many homebuyers who are exempt from needing mortgage loan insurance. Here are some reasons you may not need, or may not qualify for, CMHC mortgage loan insurance:
While many homebuyers may choose to avoid CMHC mortgage loan insurance premiums altogether, this is not an option for everyone. Saving up enough money to afford 20 per cent of your home’s purchase price can be a daunting task. CMHC mortgage loan insurance, and other similar insurance programs, can help make the purchase of a house accessible to a greater range of buyers. Whether you are a first-time buyer, a young parent, or you would simply like to retain your savings for other projects, CMHC mortgage loan insurance can be a great option for you. Through the help of CMHC insurance, you can become a homeowner sooner than you expect, in turn allowing you to take advantage of the appreciating value of your property over time.
Through CMHC mortgage loan insurance, you can take out a mortgage for up to 95 per cent of your property’s purchase price (given that the price of this property falls under $1 Million CAD), allowing you to invest in properties that may have otherwise been outside your price range.
CMHC mortgage loan insurance can also help you secure a competitive interest rate on your mortgage. By insuring your mortgage, you reduce the risk to the lender, which often results in more favourable interest rates for you, the borrower.
Another benefit of CMHC mortgage loan insurance is the stability it can offer both borrowers and lenders during uncertain economic conditions (such as those caused by the pandemic). By insuring the mortgage, the borrower can purchase a home without sacrificing too much capital upfront, and the lender can rest assured that their return on the loan is protected.
It is also important to recognize that are some cons to CMHC mortgage loan insurance. The most obvious con is the cost of the insurance premium. If you cannot afford to pay this sum upfront, you will incur interest on it monthly, increasing your overall costs in the long run.
The best way to determine whether CMHC mortgage loan insurance is the right choice for you is to work with a professional mortgage broker and explore your options. Together, you can decide upon the best buying strategy for your unique situation.
If you are looking for expert mortgage advice tailored to your personal needs, schedule a free consultation with a trusted Clover Mortgage broker today!