Introduction
Purchasing a home is probably the most significant financial commitment that most Canadians make and for those who cannot raise a large down payment, Canada Mortgage and Housing Corporation (CMHC) mortgage insurance may be necessary.
Central to helping Canadians become homeowners, protection for high-ratio mortgages, often described as loans with less than a 20% down payment, is key to CMHC mortgage insurance.
However, CMHC, mortgage default insurance or loan insurance not only helps to gain home financing but also has effects on monthly payments. This article will explain the purpose of CMHC mortgage loan insurance, how it works with the monthly payments, and then how to deal with it.
CMHC mortgage insurance protects the lenders from loss in case of default of mortgages.
For Canada, high-ratio loans are defined mainly as mortgages where the down payment is less than 20%.
Since it an insured mortgage absorbs risk for lenders, CMHC insurance enables more Canadians to access home loans hence opening access to homeownership by people who cannot afford a mortgage loan or large down payment.
The CMHC mortgage insurance lets one own a home with little initial investment but demands another cost to be paid by the potential homeowner.
When is CMHC Insurance Compulsory?
For high-ratio mortgages in Canada, CMHC insurance is mandatory. Lenders require this if a down payment is less than 20% of the home’s purchase price. Some conditions and coverage limits must be met by CMHC insurance:
1. Insurance Coverage Limit:
CMHC mortgage insurance covers loans up to a maximum purchase price of $1,000,000 however applicants have to provide minimum 5% down payment too .
2. Loan Term and Loan-to-Value (LTV) Ratio:
Depending upon loan-to-value ratio loan term will be determined. LTV measures how much is paid towards appraised value of the property. Higher LTV gets more insurance premium rates.
How the CMHC Mortgage Insurance Premium is Calculated
Premium Rate
The premium rate of CMHC is calculated by the percentage of down payment and the LTV ratio.
It is the total of loan amount with premium added as a percentage of the loan amount and increases with the percentage of the down payment. Below are examples of CMHC premium rates based on the percentages of down payments.
• 5 percent down payment: 4% premium on the mortgage amount
• 10% down payment: 3.1% premium
• 15% down payment: 2.8% premium
That is, the more the down payment, the higher percentage of premium reduction is needed so that additional economic incentive is given to an existing home to a buyer who has a bigger upfront sum down.
Prepaid vs. Tack-on Premiums
A borrower has two choices in terms of paying the CMHC premium-one is that it is paid upfront or is amortized into the mortgage-a feature that impacts monthly mortgage repayments.
Added to the mortgage, interest accrues on this extra payment, thereby increasing what is needed to pay out monthly mortgage repayments.
Paying it upfront saves the interest cost but it puts someone into a typically expensive expense at the time when a borrower begins a transaction.
How CMHC Fees Add to Monthly Mortgage Payments
Calculating Monthly Payments
A mortgage monthly payment comprises principle, interest, property taxes, and CMHC insurance.
The CMHC premium is dispersed over the full liability of that loan and those dollars dispersed evenly over the term of that liability.
As the CMHC insured mortgage default insurance premium does increase the liability, this then carries a greater cost each month than an equivalent loan not covered by mortgage default insurance would.
Example Calculation
We will have a very straightforward hypothetical mortgage by way of example, something like this:
• Home price: $400,000
• Down payment: 5%($20,000)
Amount of loan: $380,000
• CMHC insurance premium (4% of $380,000): $15,200
• Total mortgage amount with CMHC insurance : $395,200
That means interest and payments will be much higher without CMHC in such a case.
Benefits of CMHC Mortgage Insurance
Lower Down Payment Requirements
The CMHC insurance enables homebuyers to enter the market with a lower down payment. That is very helpful to a first-time homebuyer or to one having limited savings.
CMHC insurance lowers the minimum amount of down payment so more Canadians can become homeowners.
Increased Home Ownership Access
A higher percentage of Canadians would be able to own their homes than otherwise would through CMHC insurance.
Statistics would illustrate that insured mortgages help in a more stable housing environment for more families and thereby homeownership countrywide.
For some people, CMHC insurance opens the chance of entering the housing market much earlier than might have been possible otherwise.
Negative Sides of CMHC Mortgage Insurance
More Expensive Monthly Payments
CMHC insurance makes a mortgage relatively affordable.
But this is added up to monthly payments with extra insurance premiums tacked on to the mortgage principal that really serves to raise the amount of borrowing as interest is charged against those dollars, which is then added onto higher paying months.
Other costs really start to sink in with consumers, especially low-income families trying to squeeze their home purchase prices into what they can afford.
Total Interest Paid Over Lifetime of Loan to value ratio
Adding CMHC insurance to the mortgage adds to the loan principal. When amortized over a 25- or 30-year term, this can add up to significantly higher total interest costs.
For example, a 25-year mortgage with a 4% mortgage loan insurance premium pays significantly more in interest than a mortgage without it. Buyers may pay thousands of dollars more over the life of the mortgage loan insurance due to value premium.
Strategies to Redistribute the Load of CMHC Premiums
Deposit More Money for Down Paying
A higher percentage of down payment would attract, or even eliminate CMHC insurance.
For example, a 20% down payment will even eliminate the premium completely; therefore, it saves thousands of dollars before the end of the mortgage loan for mortgage life insurance. This is through spending more amount of capital upfront, an impossible thing to everyone
Seek Best Mortgage Rate of Interest
This can bring a low interest rate, which helps even out the full mortgage life insurance and premium in monthly pay. Compare many lenders’ rates to ensure you get the best option as every little reduction in interest really adds up over time.
Anticipate Refinancing
When the owner has enough equity in the house, refinancing can offer the opportunity to pay back CMHC insurance.
Once the house balance is reduced and the value of the house improves relative to the balance through principal payments, then high-ratio designation can be lifted through refinancing in order to make a chance at a new mortgage with either lesser or even zero CMHC premiums.
Conclusion
This would be useful for any homebuyer to know the effects of CMHC mortgage insurance on monthly payments.
Although CMHC insurance may make it possible to buy a house with a smaller down payment, it does make monthly payments and total interest costs much higher in the long run.
However, there are ways around this, like increasing the first down payment amount or getting a competitive interest rate or even refinancing in the future.
Therefore, in case you know your financial standing, you would be best informed about the fact whether CMHC insurance has financial implications for you in the long run or not.
You would need to take critical decisions on home buying with such crucial factors. If you compare the pros and cons, you will come to understand that whether the CMHC mortgage insurance goes hand in hand with financial stability or not.
