Canadian Mortgage Housing Corporation (CMHC)
What is a CMHC insurance premium? How does it benefit the consumer? How much does it cost? Many of my first time homebuyers have asked these excellent questions.
Lets start with a brief introduction on who exactly CMHC is:
What is a CMHC mortgage insurance premium?
Mortgage loan insurance is an insurance that is put on a mortgage where there is less than a 20% downpayment - this only applies to owner occupied properties. For rental purchases or refinancing on a rental property, then CMHC would have to insure the mortgage if there is less than 35% down payment/equity.
Who does the insurance premium protect?
It is a Federal Law in Canada that the lender ( the financial institution lending money) must protect themselves when there is less than a 20% downpayment on a home, from mortage default, which is when the borrower stops making timely and sufficient payments to the mortgage.
How does this benefit the consumer?
It allows buyers to purchase properties without having to save up significant amounts of money. A 20% down payment is not easily affordable by people below the age of 35. This makes buying a home more accessible and affordable to many more people.
How does the insurance premium get paid?
The insurance which is added on as a premium from the lenders, can be paid by either one lump sum or a more affordable option would be to include the monthly payment in with the mortgage.
How much does it cost?
The cost of the insurance is a specific percentage of the purchase price of a property less the down payment amount. In case of a mortgage refinance, this is calculated based on the most recent market value of the property less the existing equity in the home. Example: Jane just purchased a home for $200,000 with 5% down payment,
( $200,000 minus $10,000 = $190,000). Jane's CMHC premium based on todays CMHC rates comes to approximately 3.15% (3.15% of $190,000 is $5985.00) Jane's total mortgage amount would be 190,000 + $5985.00 would be $195,985
Any additional charges?
There is a PST amount to be paid on the insurance premium as part of the clients closing costs. The PST amount is NOT added on top of the mortgage like the actual premium is. Example: In Jane's case above she would pay 8% of $5985.00 (which comes to $478.80) as part of her legal fees.
There are other default insurance providers in Canada. CMHC has become the most popular one. Other insurance providers work similar to CMHC and most have the same requirements.