What is CMHC Insurance?

 

Mortgage Default Insurance or CMHC Insurance

Mortgage default insurance, which is 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 the event a borrower ever stopped making payments and defaulted on their mortgage loan.

 

Although mortgage default insurance costs homebuyers 2.8% - 4.00% of their mortgage amount, it does allow Canadians, who might not otherwise be able to purchase homes, access to the Canadian real estate market. Without it, mortgage rates would be higher, as the risk of default would increase. Lenders are able to lower mortgage rates when mortgages are protected by mortgage default insurance, because the risk of default is passed along to the mortgage insurer.

 

There are some requirements you have to meet in order to quilify for mortgaga default insirance:

  •  The maximum amortization for insured mortgages is 25 years.
  •  If the purchase price is between $500,000 - $900,000 a higher down payment is required. The minimum down payment is 5% of the first $500,000 and 10% of the remaining amount.
  •  Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% down payment is required on these homes.
   

 

Who Offers Mortgage Default Insurance?

There are three mortgage default insurance providers in Canada:

 

   1. The Canada Mortgage and Housing Corporation (CMHC);

   2. Genworth Financial ;

   3. Canada Guaranty.

 

 

 

As of March 2017, if your down payment (% of home price) is:

 

  •  5% - 9.99% your insurance premium rate is 4.00% ;
  • 10% - 14.99% your insurance premium rate is 3.10% ;
  • 15% - 19.99% your insurance premium rate is 2.80% ;
  • 20% or higher, your insurance premium rate is 0.00% ;

Note: These are same rates charged by all three providers.

 

 

 

How Do You Calculate Mortgage Default Insurance?

Let's say you just purchased a property for $300,000 and made a $40,000 down payment. Your mortgage default insuance would be calculated as follows:

 

Property Value  Down Payment       25 Yrs

 $300,000            $40,000         Amortization

 

 

Step 1:  Calculate your down payment as a % of your home price:

 $40,000 / $300,000 = 13.33%

 

Step 2:  Calculate your mortgage amount:

 $300,000 - $40,000 = $260,000

 

Step 3:  Calculate your mortgage insurance premium: 

 $260,000 x 3.10% = $8,060

 

 

 

How Do You Pay Mortgage Default Insurance?

Mortgaga default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060; this is how much you would need to borrow from your lender, in order to purchase your home.

 

 

How To Minimize Your Mortgage Default Insurance?

There's onlu one way to minimize your mortgaga default insurance: increase your down payment as a percentage of your home price. To do this, you either have to increase the amount you put down or purchase a less expensive home.

Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time homebuyer, a tax-free withdrawal from your RRSP.
 

 

  Courtesy of RateHub.Ca

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