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What is CMHC Insurance?

What is mortgage default insurance?

Mortgage default insurance is commonly referred to "CMHC Insurance" because the largest provider in Canada is the Canadian Mortgage and Housing Corporation. However there are two other companies that offer mortgage default insurance as well Genworth Financial and Canada Guaranty.

Mortgage default insurance is necessary for down payments of less than 20% of the purchase price of a home. In other words it allows Canadians who don't have 20% saved for a down payment to enter the real estate market at an additional cost (spread out over the life of the mortgage). Lenders offer lower rates to insured mortgages because they take on less risk when compared to uninsured mortgages. However the additional cost of the insurance offsets the lower rate. It is always preferable to bring as high a down payment as possible – not only do you have to finance less money but you have the option of extending to a 30-year amortization.

 

What does CMHC insurance cover?

CMHC insurance is taken out by your mortgage lender not by you. Unlike life insurance the beneficiary of which someone of your choosing the beneficiary of CMHC insurance is the institution that lends the money. It covers the bank not you.

If you’re not able to make your mortgage payments and your lender can foreclose or enforce power of sale. These are both last resorts – the lender would much rather the borrower continue to make payments than try and sell the house.

If the house is sold for less than what the borrower owes on the house the lender gets reimbursed by CMHC (or other mortgage default insurance provider). Since they’re insured that means that nothing more happens to you right?

Wrong.

Remember the lender is the insured party in this case not you. CMHC will actually come after you personally for any shortfall that they had to pay to your lender.

This won’t happen if your home has appreciated or if your mortgage balance was low enough that the outstanding debt was covered with the sale. In cases of power of sale you will even get any leftover money after repaying the mortgage.

 

Mortgage Default Insurance Rules

There are a few rules for qualifying for mortgage default insurance.

  1. The minimum down payment is 5% of the purchase price
  2. The maximum down payment is 19.99% of the purchase price
  3. The maximum value of the property is $1 million
  4. The maximum amortization period is 25 years
  5. Your GDS shouldn't exceed 32% and your TDS shouldn't exceed 40%. For more information about GDS and TDS ratios click here.

Mortgage default insurance premiums


Although there are three different companies that offer mortgage default insurance they all charge the same premiums. Premiums are always calculated as a percentage of the purchase price.

Premium

Down Payment as a Percentage of Purchase Price

5 – 9.99%

10 – 14.99%

15 – 19.99%

20%+

4%

3.1%

2.8%

Not required

 

 

Paying Mortgage Default Insurance Premiums

The cost of CMHC insurance is either added to your mortgage or paid up front.

If you don’t have enough money to bring a 20% down payment it’s likely that you don’t have enough money to pay the premium up front either so you’ll probably roll the cost of the insurance into your mortgage.

That means two things: first you reduce your equity; second you start paying interest on the premium.

Let’s say you bring the minimum down payment required: 5%. You’ll have to get mortgage insurance which is 4% of the purchase price with a 5% down payment. When you close your mortgage your equity is now only 1% instead of 5%. It’s kind of funny how you can’t buy a house with 0% down but you can end up with 1% equity.

 

Case Study

Take a look at how this affects buying a house worth $500000 with different amounts down.

 

Effect of CMHC Insurance on Equity

 

5% Down

10% Down

20% Down

Home Value

$500000

$500000

$500000

Down Payment

$25000

$50000

$100000

CMHC Premium

$19000

$13950

$0

Total Mortgage Amount

$494000

$463950

$400000

Equity

$6000

$36050

$100000

 

Imagine you're buying a house worth $500000. Let's take a look at how different down payment amounts affect how much you have to pay.

As you can see paying the minimum 5% down payment is actually quite expensive. If you put $25000 down but need insurance for $19000 your equity is only $6000 instead of $25000. In other words you only have 1% equity when you buy a home with 5% down.

When calculating your home affordability consider whether you can increase your down payment to the next CMHC threshold. Going from 9% to 10% down can save you thousands of dollars in insurance premiums. And as always compare mortgage rates online to be sure you’re getting the best rate.


Ali Ali 01/26/2019
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