CMHC Insurance is actually called Mortgage default insurance, despite often being referred to as CMHC insurance. This is an essential cost in Canada for all homebuyers who are putting a down payment (deposit) of less than 20% of the property’s total purchase price.
CMHC is in place to protect the lenders if you stop making payments, which leads to you defaulting on the loan agreement you have set in place. The cost of CMHC is paid monthly from the start of your mortgage period.
Mortgage default insurance can range in significance depending on the down payment level on the property you have made. This ranges from 2.8% to 4% (or 0% if you put a down payment of higher than 20%). While it may seem like a lot of money, it does serve a purpose. Because it gives lenders extra protection, they are more likely to lend to borrowers with smaller down payments, which can benefit Canadians who would otherwise not have the funds to purchase their homes. It means that lenders do not charge higher interest rates to cater to the higher level of risk they are taking on, as the risk of default moves from the lender to the mortgage insurance company.
How to Calculate your Mortgage Default Insurance
To calculate your Mortgage Default Insurance, you must first determine the level of down payment you will be utilizing. This can range from 5% to 20%, and the level of mortgage default insurance reduces with the higher down payment:
- 5% Down Payment = 3.8% CMHC
- 10% Down Payment = 2.79% CMHC
- 15% Down Payment = 2.38%
- 20%> Down Payment = 0%
Based on the above, it can be clear that if you want to minimize your monthly payments significantly, then it is really key to try and aim to put at least 20% down when obtaining your mortgage. As you will see in the next point, the monthly cost can be greatly impacted by just putting 5% of a down payment into your purchase.
How do you pay for Mortgage Default Insurance?
Mortgage default insurance comes out through your mortgage payments. There are no high single lump-sum payments to get this insurance. Instead, your payments are added on top of your mortgage and paid off over your loan’s amortization period.
For example, let’s say you purchase a property for $500,000 with a 10% down payment. This means you will have to pay 2.79% CMHC, which equates to $13,950. This means your mortgage will be on the basis of $500,000 + $13,950 = $513,950 in total. This is the total in which you would need to borrow from your chosen lender when you are going through the process of purchasing your property.
Providers of Mortgage Default Insurance
Tips to Reduce your Mortgage Default Insurance
The only real way to reduce the amount you pay each month on top of your base mortgage with the addition of the mortgage default insurance is to increase the down payment you are making on your property. This is a two-pronged impact as well, as with an increased down payment, you will be required to borrow less, and therefore your monthly payments will be lower overall. This can be a great benefit for those looking to reduce their monthly spending.
Overall, you have two options. Either find a property with a lower purchase price (therefore, you can afford a higher down payment) or save more to increase your down payment. Alternatively, you can look towards the family who may be willing to lend you some extra funds to take you closer to that magical 20% down payment level. These are key reasons that planning out your strategy when buying a home is essential.