What is CMHC Mortgage Loan Insurance?
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.To obtain mortgage loan insurance, lenders pay an insurance premium
. Typically, your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate Amortization periodDownpayment (% of home price) 5% - 9.99%10% - 14.99%15%-19.99%20% or higher31-35 years
N/AN/AN/A0.00%25 years or less
2.75%2.00%1.75%0.00%Source: Canada Housing and Mortgage Corporation (CMHC)How do you calculate mortgage default insurance?
Let's say have just purchased a $300,000 home and have saved $40,000 for a down payment. You have decided to pay off your mortgage over the course of 25 years. Your insurance would be calculated as follows:Step 1:
Calculate your down payment as a % of your home price$40,000 / $300,000 = 13.33%Step 2:
Factor in your amortization periodAmortization period is between 25 years or lessStep 3:
Find your insurance premium percentage in the chartInsurance premium percentage is 2.00%Step 4:
Calculate your mortgage amount$300,000 - $40,000 = $260,000Step 5:
Calculate your mortgage insurance premium$260,000 * 2.00% = $5,200How do you pay mortgage default insurance?
Mortgage default insurance is financed through your mortgage. Unlike closing costs
such as lawyer fees and land transfer tax
, it does not require a lump sum cash outlay at the time you purchase your home. Your insurance premium is added to the value of your mortgage, and your monthly payment increases accordingly
. Continuing with the above example, the revised mortgage amount would be $260,000 + $5,200 = $265,200.How to minimize CMHC insurance
There is one way to minimize mortgage default insurance:1. Increase your down payment (as a percentage of your home price)Increase your down payment (as a percentage of your home)
If you want to increase your down payment as a percentage of your home value, you will either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time home buyer, a tax-free loan from your RRSP
.Mortgage default insurance rates with a non-traditional down payment
For homebuyers using non-traditional sources for their down payment, their insurance premiums will increase if their down payments are between 5 and 9.99%, as shown in the chart below.Amortization periodDown payment (% of home price) 5% - 9.99%10% - 14.99%15%-19.99%20% or higher31-35 years
N/AN/AN/A0.00%25 years or less
N/A4.75%2.90%0.00%Source: Canada Housing and Mortgage Corporation (CMHC)