The Canada Mortgage Housing Corporation provides mortgage loan insurance to lenders for home buyers with a down payment of less than 20%, to as low as 5%. It offers a way for borrowers to get away with putting down a lower down payment than a lender might like.
However, it is important to note that this insurance is not meant to protect the buyer; it is used to protect the lender. CMHC insurance guarantees the bank or credit union that it will not lose money on this high ratio mortgage. If a borrower has more “skin in the game,” he or she is considered less of a risk. A 20% down payment usually represents a large commitment to the home, and a lender can feel reasonably sure that such a borrower won’t default on the mortgage loan.
How Does CMHC Insurance Work?
CMHC mortgage insurance is purchased to compensate the lender in the event that you default on your loan. Since it is the lender that is putting up the capital for your home purchase, the lender takes on the bulk of the risk of you don’t follow through. Insurance can help offset some of the risk involved.
It is the lender that technically pays the CMHC mortgage insurance premium, though the cost will pass to you. Many lenders add the insurance premium amount into the mortgage, so that you will not need to pay it immediately.
How much will CMHC insurance cost you? There are three cost tiers for employed people with verifiable income:
- 15% to less than 20% down payment requires a standard insurance premium of 1.75%
- 10% to less than 15% down payment requires a standard insurance premium of 2.00%
- 5% to less than 10% down payment requires a standard insurance premium of 2.75%
There is also a premium paid on mortgages that are amortized over more than 25 years.
- Over 25 years, up to and including 30 years, carry an extended amortization surcharge of 0.2%
- Over 30 years, up to and including 35 years, carry an extended amortization surcharge of 0.4%
As you can see, the smaller your down payment, the more you pay in charges. On top of that, if you want a longer mortgage term (resulting in a smaller monthly payment), you have to be willing to pay the surcharge. The longer your mortgage term, especially when combined with a smaller down payment, the larger the chance that you default on your commitment.
If you want to reduce your costs, the CMHC has a program that provides a 10% refund on your premiums and no surcharge on extended amortizations if you purchase an energy eficient home, or if you renovate your home to make it more energy efficient. If you are environmentally conscious, this can be a great way to save a little money, as well as the earth.
While you would benefit from having a 20% down payment, in both interest and premiums saved, CMHC mortgage loan insurance serves a purpose by allowing people to buy a house with a smaller down payment. Being insured against loss, the bank is less concerned about the higher risk they take on, which allows the buyer to stop renting and start building equity in a home of their own.
Before you decide to buy a house, though, think about whether or not you can afford a bigger down payment. Weigh the costs and benefits of saving up for a down payment and paying less over time, or getting into a home sooner, but paying a larger amount over the life of your loan. Only you can decide which scenario is likely to provide you with the best use of your financial resources.