If you’re looking into buying a property in Canada with less than a 20% down payment, then CMHC insurance is probably on your radar. Commonly referred to as CMHC (Canada Mortgage and Housing Corporation) insurance, mortgage default insurance isn’t required for all mortgages. In Canada, mortgage default insurance is mandatory for any home purchase with down payments between 5% (the minimum in Canada) and 19.99%.
Mortgage default insurance protects lenders, in the event a borrower stops making payments and defaults on their mortgage loan. In Canada, lenders pass on the cost of this insurance to any borrower who purchases a property with a less than a 20% down payment. In the event that a buyer is required to get mortgage loan insurance, it’s the lender who pays the premium and then charges this cost to the buyer either in a bulk sum or tacked on to his or her mortgage in monthly payments.
How is my CMHC premium calculated?
While known as CMHC insurance, this type of insurance product isn’t limited to CMHC. There are other, private lenders who also provide mortgage loan insurance, such as Genworth Financial and Canada Guaranty.
The cost of this type of insurance — which shouldn’t be confused with life insurance or home insurance — is calculated based on the loan amount (your mortgage) divided by the purchase price. (This is called the loan-to-value ratio.) A buyer’s exact premium is going to be determined once the mortgage application goes through, but you can get a pretty close approximate using the online CMHC calculator.
To illustrate what a monthly CMHC cost could look like, say a first-time buyer leaving the Toronto bubble wants to buy a two-bedroom home in Hamilton for $479,000 with a 15% deposit and down payment, adding a monthly insurance premium on top of her 10-year mortgage with a rate of 6.5%. In this scenario, the premium would be $11,400.20 and her monthly payment would come out at $4,734.19.
Of course, any new buyers considering this option need to keep in mind that there are limitations beyond just the minimum down payment and overall cost of the home. In terms of choosing a mortgage for down payments under 20% of the purchase price, 25 years is the longest amortization available and still qualify for a mortgage and for mortgage default insurance.
Who benefits from CMHC insurance?
Both the buyer and the financial institution have something to gain from CMHC insurance. For the lender, this insurance is a safety net that enables a lender to grant a mortgage loan to a buyer whose down payment falls short of the standard 20% benchmark. From a homeowner standpoint, this insurance allows buyers to get into the property market without the full, conventional mortgage down payment amount.
With this said, buyers who want to purchase a home with less than 20% down, still need at least 5% of the overall purchase price for a home costing up to $500,000. (More when the price of a home is more than half-a-million.) Keep in mind, too, that the availability of mortgage default insurance, (aka: CMHC insurance) is not available for mortgages on homes costing $1-million or more.