For many Canadians, buying a home is one of the biggest monetary decisions they will ever make. Houses and apartments are expensive, meaning that most home buyers rely on mortgage loans to make the dream of homeownership a reality.
While there are many factors that need consideration in securing a mortgage, one factor regards whether or not the home buyer will be required to pay CMHC insurance, commonly referred to as mortgage default insurance.
The Canada Mortgage and Housing Corporation provides such insurance for lenders to cover them in case borrowers fail to pay their loans.
If you are thinking about making a down payment of less than 20% to buy a home, learn about CMHC mortgage loan insurance costs.
Find out what this type of insurance is, how much it costs, and what influences those costs. At the end, you will have a better understanding of your place for mortgage default insurance in the big picture budget of buying a home.
What is CMHC Insurance?
CMHC insurance is also referred to as the mortgage default insurance for all those homebuyers who do not make a down payment more than 20% of the home’s purchase price.
It is actually an insurance covering the mortgage lenders, with a point of view to save them money in case the borrower defaults on his mortgage.
This insurance allows the buyer to obtain homes with lower down payments due to a potential risk reduction for the lender. In the absence of such insurance, lenders would be less willing to accept mortgages from buyers with smaller down payments.
Thus, with the CMHC underpinning the loan, the lender can offer more favorable mortgage terms to the buyer.
Even though such mortgage insurance itself is to the advantage of the lender, the expense is passed along to the buyer in the form of an insurance premium.
Factors That Determine CMHC Insurance Premiums
There are a number of factors involved that determine how much a buyer will pay for CMHC insurance, but the two most important factors are the size of the down payment and the loan-to-value ratio.
Down Payment Size
The size of your down payment will also directly impact the insurance that you pay. CMHC insurance is mandatory for down payments less than 20 percent.
The lesser your your down payment amount, the higher your insurance premium will be. CMHC has tiered premium rates which are grouped according to percentage of the down payment.
Down payment thresholds are as follows:
– 5% to 9.99% of the home’s value: High premium.
– 10% to 14.99% of the home’s value: Mid premium.
– 15% to 19.99% of the home’s value: Low premium.
Individuals who can afford to put a down payment of 20% or more don’t have to pay for CMHC insurance because the lender feels that loan is less of a risk.
Loan-to-Value Ratio
Another significant variable that affects CMHC insurance premiums is the loan-to-value ratio. This LTV ratio measures the size of your mortgage loan in comparison to the appraised value of the home.
For example, if you pay a $50,000 down payment on a home worth $500,000, your mortgage will amount to $450,000, and your LTV ratio will be 90% ($450,000 divided by $500,000).
As we saw in above example, the higher the LTV ratio, the more leveraged it is and, subsequently, the higher the insurance premium paid. The lender has a higher risk.
CMHC premiums are calculated as a percentage of the mortgage amount. The percentage rises with a higher LTV ratio.
Premium Rates and Expenses
CMHC premiums vary by the size of the down payment, as well as the LTV ratio. Let’s walk through the premium rate structure.
Premium Rate Structure
For down payments less than 20%, here are the current rates of CMHC premium:
-LTV ratio 80.01% to 85%: 2.80% of the mortgage amount.
-LTV ratio 85.01% to 90%: 3.10% of the total mortgage amount
-LTV ratio 90.01% to 95%: 4.00% of the mortgage amount.
For a down pay an insurance premium of 20% or more, CMHC insurance is not required.
Example Calculations
To see how these premiums work, let’s have a look at a couple of example scenarios:
– Scenario 1:
You buy a home for $400,000, putting down 10% = $40,000. There will be a mortgage of $360,000 with a 90% loan-to-value ratio.
The premium rate you would get on that particular year would be 3.10%. Multiply that number by $360,000 to find the CMHC premium: $360,000 x 3.10% = $11,160. This you could pay at closing or even add it as part of being added to your mortgage amount.
Scenario 2:
You purchase a home at a value of $500,000 with a down payment of $25,000 or 5%. The mortgage amount is $475,000 and LTV ratio 95%.
The premium rate applied is 4.00%. The calculation of the CMHC insurance premium is $475,000 times 4.00%, that the insurance calculator is $19,000.
Premium Paying Methods
Paying one’s CMHC insurance owes two options: payment in lump sum or capitalization of the premium through the mortgage amount.
Methods of Payment percentage
Lump Sum Payment:
Some borrowers opt to pay their cmhc fees insurance premium in lump sum. This is left intact the overall mortgage loan and the monthly payments.
Adding the Premium Price to the Mortgage:
Most borrowers add the premium cost of the insurance premium to their mortgage. Over time, this will spread the cost of the insurance premium on total loan, but it does increase the size of the loan and, consequently, increase the monthly mortgage payments.
Impact on Mortgage Payments
The premium will be added to the mortgage loan amount which increases the amount of loan taken and hence the monthly repayment.
Add a CMHC insurance premium to your mortgage: For example, if you add a $10,000 CMHC insurance premium to your mortgage, your loan is amortized over 25 years at an interest rate of 3%. Due to the increased loan, the payment a little changes due to the larger loan sum.
Other Considerations
But in the case of cmhc fees of insurance, there are a few other factors that can be said to influence your eligibility or the cost of having this specific type of insurance.
High-Ratio Mortgages
Most housing market fall under the category of high-ratio mortgages in case the traditional down payment is below 20%.
This is also the reason why CMHC insurance is legislated for such mortgages, as it increases the risk that lenders take in their mortgage rates for financing the same.
Refundable Premiums
At other times, homebuyers may be eligible for a partial refund of CMHC insurance premiums. For example, you buy a house and then retrofit it to be energy efficient.
You can then apply through CMHC’s Green Home program for a partial refund of your premium.
CMHC Insurance Coverage
CMHC insurance, in reality, protects the lender, not the borrower. If there is a default on a mortgage, it uses the loss of the insured mortgages the lender to help clear.
This actually covers legal fees, outstanding mortgage payments, as well as other costs incurred due to the same.
But then, CMHC insurance does not protect the borrower financially. The borrower would still be liable to repay the mortgage even if he defaulted.
Defaulting an insured mortgage can lead to foreclosure and huge financial losses.
Conclusion
To most Canadians who put down less than 20% in down payment, CMHC insurance is a necessity when taking out a mortgage to purchase a home.
The size of the down payment and the loan-to-value ratio determine CMHC mortgage insurance premium prices, and one can pay in advance or attach to the mortgage.
While there is no question that CMCH insurance protects the lender, it does add to a home buyer’s costs when buying a home.
Understanding how much and what cost the CMHC insurance will add while deciding on your home buying is very important.
It helps you, as a buyer, to include premium costs in your budgets so that the real process of mortgage approval does not come as a surprise.