Mortgage rates, property taxes, down payments, etc. There is a lot to keep track of when navigating the housing market as a first-time homebuyer. Two things that many people do not know about until they purchase homes are insured and uninsured mortgages.
Insured mortgages are home loans that have CMHC insurance coverage. Coverage is required on any home purchase where the down payment is 20% or less.
To help you better understand CMHC insurance, we will explain why your down payment matters, the required qualifications, and how much you can expect to pay.
Your Down Payment: How It Could Make Or Break Your Need To Buy CHMC Insurance
Many people save for a down payment for years, setting aside portions of their monthly income in hopes of purchasing a home. But, with the Canadian real estate market on the rise, it is becoming more and more challenging to make a down payment.
Thankfully, the minimum down payment requirement in Canada is 5%. If you buy a home valued at $600,000, you only need a down payment amount of $30,000. While 5% is minor down payment buyers are allowed, anywhere from 5-20% is considered a high ratio mortgage.
High ratio mortgages are seen as high risk because the loan to value ratio rests at 80% or higher. In simpler terms, the loan amount accounts for more than 80% of a home’s value.
All high ratio mortgages need to be insured due to their additional risk to lenders. A CMHC insured mortgage means that buyers need to purchase mortgage default insurance.
What Is Mortgage Loan Insurance?
Mortgage loan insurance, also called mortgage default insurance, is a type of insurance that protects mortgage lenders’ interests.
A mortgage is a lot of money and if the borrower stops making payments towards their mortgage loan, the lender can be out hundreds of thousands of dollars. CMHC mortgage insurance can protect the mortgage lender by covering the cost of the mortgage amount if the homebuyers default on their monthly payments.
Mortgage Life Insurance
Mortgage default insurance is not to be confused with mortgage life insurance, also known as mortgage protection insurance. Mortgage life insurance is a type of life insurance that will cover your monthly mortgage payments if something were to happen to you.
Some critical illness insurance and disability insurance policies may also pay your mortgage payments if you cannot work due to an injury or illness. Thanks to life insurance, you can have peace of mind. Your family or loved ones do not have to borrow money to pay off your remaining mortgage balance; your life insurance company will cover it.
Who Provides Mortgage Default Insurance?
There are three mortgage default insurance providers in Canada: the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and Canada Guaranty.
While all three lenders can provide CMHC insurance, the CMHC is the governing body that controls mortgage default insurance in Canada. All providers need to uphold their standards and policies.
How Do I Qualify For Mortgage Default Insurance?
The CMHC also requires all borrowers to have:
What Does Mortgage Default Insurance Cost?
Since CMHC mortgage insurance benefits lenders, lenders are the ones who have to pay it. But, more financial institutions make their borrowers pay mortgage default insurance for them.
CMHC insurance premiums are calculated as a percentage of your loan to value ratio for the entire length of your amortization period. After it is calculated, the total cost is added to your mortgage at the point of purchase.
Buyers can determine their mortgage default insurance premiums based on the chart below.
Loan-to-Value Premium Chart
Note: You may need to pay provincial sales tax when you purchase CMHC insurance.