Mortgage default insurance, often referred to as CMHC insurance , protects the lender from losses if the borrower stops making payments and defaults on their mortgage. Without this added protection, the big mortgage lenders, like banks and credit unions, would be less willing to lend money to a large segment of the Canadian population.
What Is CMHC?
The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation of the Government of Canada, and the primary provider of mortgage insurance in Canada. Two other companies, Genworth Canada and Canada Guaranty, offer similar coverage, but the CMHC name is so well-known that it’s become synonymous with the product itself.
It’s a requirement that all mortgages in Canada with less than 20% down payment be covered by mortgage insurance. Home buyers benefit from being able to purchase a home with as little as 5% down, making it much easier to enter the housing market. Mortgage insurance also improves the liquidity of the overall housing market.
There are costs associated with obtaining a CMHC mortgage and specific criteria you must meet in order to be approved. That’s why it’s important to understand how mortgage default insurance works before you buy a home.
Recent Changes To CMHC Coverage
Recently, in a move designed to protect the Canadian housing market during the current economic crisis, CMHC introduced some changes to their approval criteria. Effective July 1, 2020, borrowers must now meet the following conditions:
- A minimum credit score of 680
- Gross Debt Service Ratio (GDS) cannot exceed 35%
- Total Debt Service Ratio (TDS) cannot exceed 42%
- Down payment cannot come from borrowed funds
These changes reflect a tightening of rules. Previously, as long as one borrower had a credit score of 600, they could qualify. Also, maximum GDS and TDS were 39% and 44% respectively.
How Does Mortgage Insurance Work?
When you apply for an insured mortgage, your application will need to be approved by your lender, as well as CMHC. Though there are actually three companies that offer mortgage default insurance in Canada, CMHC is the primary provider.
There is a cost for CMHC insurance, which is paid by the borrower. This charge is referred to as a CMHC premium, and it is most often financed with the mortgage. CMHC premiums are taxed at the provincial level, and this amount must be paid up front at the time of closing.
While 30-year amortizations are available on a conventional mortgage, the maximum amortization for a CMHC mortgage is 25 years. As I touched on earlier, there is a minimum credit score requirement of 680, and maximum debt servicing ratios of 35%/42% [BL7] on all insured mortgages.
Some property types require mortgage insurance, regardless of the down payment percentage. These include mortgages on mobile homes and properties that may not qualify under conventional lending guidelines.
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance depends on two factors – your mortgage amount and your down payment percentage. I’ve included a sample calculation below. The majority of home buyers finance the CMHC premium with the mortgage, although it can be paid in full at the time of purchase . The provincial sales tax on the CMHC insurance premium does need to be paid at the time of closing. It cannot be financed.
How Are CMHC Premiums Calculated?
CMHC premiums range between 2.80% – 4.00% of the overall mortgage amount, based on the following loan-to-value percentages:
|Up to and including 95%||4.00%|
|Up to and including 90%||3.10%|
|Up to and including 85%||2.80%|
The premiums listed above cover all mortgages with less than 20% down payment. Lenders have the option of purchasing CMHC insurance on mortgages with more than 20% down payment, but the borrower is not required to pay for it.
Let’s say you’re purchasing a $300,000 house, with a 5% down payment ($15,000). Your CMHC premium and mortgage amount is calculated as follows:
$300,000 PP – $15,000 DP = $285,000
$285,000 x 4.00% = $11,400
Total mortgage amount borrowed = $296,400
The Provincial Sales Tax (PST) charged on the CMHC premium of $11,400 will depend on the province in which you live, but it needs to be paid in full at the time of closing.
What Is My Minimum Down Payment?
To qualify for a CMHC mortgage, you’ll need to put 5% down on any purchase up to $500,000. If the price of the home is over $500,000, a 10% down payment will be required on the amount between $500,000 – $1,000,000. CMHC insurance is not available on homes over $1M, meaning that a 20% down payment would be required.
To illustrate, let’s assume you are purchasing a home for $750,000, and you wish to apply the minimum down payment. You would calculate it as follows: 5% on the first $500,000 = $25,000 + 10% on the remaining $250,000 = $25,000, for a total of $50,000 down payment.
For a conventional mortgage on the same purchase of $750,000, the minimum 20% down payment would be $150,000, making it easy to see how CMHC insurance improves the prospects of homeownership for thousands of Canadians.
Conventional Vs. CMHC mortgage
If your down payment is 20% or greater, your mortgage is considered to be conventional, meaning that it is not covered by CMHC. The main benefit of a conventional mortgage is the cost savings, as you aren’t being charged for the CMHC premium. Also, a conventional mortgage application doesn’t require the additional approval from CMHC, which has its own set of fairly strict lending criteria. Banks have more flexibility when it comes to approving a conventional mortgage, as they deem it to be a lower risk.
Ways To Avoid CMHC Fees
If you’re wondering how to avoid CMHC fees, the best way is to come up with the 20% down payment required for a conventional mortgage and skip CMHC altogether. If you can’t do that, remember that by increasing your down payment, you can reduce your CMHC fees. As soon as your down payment exceeds 10%, your CMHC premium drops from 4% of the overall mortgage amount to 3.10%. You’ll also save on the provincial sales tax, which is added to the fee.
Final Word On Mortgage Insurance
My hope is that, after reading this article, you have a better understanding of how mortgage insurance works. There is one other thing I should point out. Many Canadians confuse mortgage default insurance with mortgage credit protection. Credit protection is sold by the lender and/or by the mortgage broker, and covers the borrower for life, and/or disability/critical illness. So, it’s important to make sure you know which of these your lender is referring to when you sit down to meet with them.
Tom Drake is an authority in Canadian personal finance. He is a financial analyst and has been writing about personal finance since 2009 at the award-winning MapleMoney. His work has appeared in MintLife, Canadian MoneySaver, and U.S. News & World Report, and has been quoted in The Globe and Mail, Yahoo Finance, and Financial Post.