Mortgage default insurance, which is more commonly referred to as CMHC insurance, is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage default insurance protects lenders in a situation where a borrower stops making payments and subsequently defaults on their mortgage loan.
What is the CMHC?
CMHC stands for “The Canada Mortgage and Housing Corporation”. The CMHC is a government department that acts as Canada’s national housing agency and its mandate is to help Canadians access affordable housing options. Providing mortgage insurance (CMHC insurance) to homebuyers is one of its main activities.
The Basics of CMHC Insurance
If you want to buy a home with a down payment of less than 20%, you will need mortgage loan insurance. This protects your lender in case you can’t make your payments and potentially default on the mortgage loan. Your lender pays an insurance premium on mortgage loan insurance, which is calculated as a percentage of the mortgage and is based on the size of your down payment. Your lender will pass this cost on to you which results in you paying what we described as CMHC insurance. You can pay it in a lump sum or add it to your mortgage and include it in your payments.
Benefits of CMHC Insurance
- CMHC insurance lets you get a mortgage for up to 95% of the purchase price of a home. It also ensures that you get a reasonable interest rate, even with your smaller down payment.
- CMHC insurance helps stabilize the housing market as well. During economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.
- It’s accessible to many types of borrowers: Canadian citizens, permanent residents of Canada, or non-permanent residents who are legally authorized to work in Canada.
Minimum Down Payment
To get CMHC insurance, you will need a minimum down payment. The amount depends on the purchase price of the home:
- If the home costs $500,000 or less, you will need a minimum down payment of 5%.
- If the home costs more than $500,000, you will need a minimum of 5% down on the first $500,000 and 10% on the remainder.
- If the home costs $1,000,000 or more, CMHC insurance is not available.
Property and Occupancy Requirements
The property must be located in Canada and must be suitable and available for full time and year round occupancy.
- The property must also have year round access including homes located on an island (via a vehicular bridge or ferry).
- For homeowner loans, CMHC-insured financing is available for one property per borrower/co-borrower at any given time and must be intended for homeowner occupancy, or a relative of the owner-borrower on a rent-free basis.
CMHC Insurance Cost Breakdown
The insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums.
- For example, if you were to purchase a home for $300,000, with a 5% down payment and 25 year amortization loan, your CMHC insurance cost would be $7,838, stretched out over the monthly or bi-weekly mortgage payments over the 25 year amortization period.
- At the same purchase price of $300,000, but with a 10% down payment and a 25 year amortization loan, your CMHC insurance cost would be reduced to $5,400.
Did you know that CMHC offers a premium refund of up to 25% on the CMHC insurance premium when you buy or build an energy-efficient home, or you buy an existing home and make energy-saving renovations? Click here to learn more!
Want to Run a Real Estate Purchase Scenario?
Click here to calculate your total CMHC insurance cost based on your purchase price, down payment amount and your amortization period.
What if I Want to Avoid CMHC Insurance?
You can avoid paying CMHC insurance by putting a minimum of 20% as a down payment. It’s also possible to avoid CMHC insurance if you refinance your mortgage and leave at least 20% in the home. In doing this, you may be able to save money by requesting a shorter amortization period.
What Does This All Mean?
Depending on your buying strategy, it is important to ask yourself, “do I need cash flow to invest/spend? Or shall I invest in real estate and save myself thousands of dollars by avoiding CMHC Insurance costs?” Typically, mortgages are the lowest interest rate loan you will receive, therefore each individual’s financial situation is unique, and you must look at the number with your lender, and/or financial advisor(s).
David is a REALTOR® working in Winnipeg, Manitoba at Royal LePage Alliance. If you are looking to purchase a home within the near future or have specific questions regarding the Winnipeg real estate market, please feel free to contact me today using the number of e-mail address below!