What is CMHC insurance and what do I need to know about it?
Posted on Aug 14, 2017 in Mortgage Market Updates and News
CMHC or Canada Mortgage and Housing Corporation, is a topic I constantly get questions about. So what is CMHC? When is it required? What are the benefits? What are the costs? When do you pay it? What do you need to know.. Here's everything you as a mortgage borrower, need to know about CMHC.
What is is and when do I need it?
CMHC is mortgage default insurance. It's required on every purchase mortgage in Canada where the purchasers are putting less than 20% as a down payment. For first time home buyers, putting less than 20% down (typically 5%) is the norm. Default insurance is required regardless of where you buy, who your lender is, how strong your application is, etc. It's simply a requirement of putting a small down payment.
What is it?
Now that we understand generally what CMHC is, it's important to understand what it is not. A lot of clients hear insurance and start to make assumptions about what they're covered for, so I like to be clear. It's not house insurance. You will still need to insure your home for fire, earthquake, content loss, etc. It's not life insurance. You will not be covered through CMHC in any way if you or another borrower on your mortgage pass away, become disabled, etc. Default insurance covers the lender (this is a really important part - the lender), if you default on your mortgage, your house is foreclosed, and the lender loses money on the sale, and associated costs. It's not an insurance to cover you. It's an insurance that you pay, to protect your lender. In other words, it allows your lender to have very little risk as if the mortgage isn't paid, they'll generally recover their losses from CMHC. So what it does do, and although I've made it sound a bit grim here's the upside, it allows lenders to lend to borrowers with very small down payments. Wouldn't it be awful if we had to save 20% before we could purchase a home? CMHC gives us the opportunity of being able to buy without having to save large down payments.
Who else offers it?
I keep saying CMHC, but in reality, your mortgage may not be insured with CMHC. CMHC is just the most well known insurer. There are two other insurers in Canada who can insure your mortgage, Genworth and Canada Guarantee. They all cost the same and follow generally the same guidelines, but different insurers definitely tend to be more flexible on different situations so having all 3 is definitely advantageous to borrowers.
Do I have to be approved for it?
Yes. Insurers review and approve each mortgage application. You likely won't know your mortgage has gone through CMHC approval as it's a step you're not involved in. Lenders typically first review your application and preliminarily approve it, then they send it to an insurer for their approval. If they can't get one of the 3 insurers to approve it, your mortgage is declined. Insurer approval can often be the most difficult approval to get and borrowers some times end up feeling frustrated that the lender was okay with their application, and even though they met the insurer guidelines, they were still declined. The insurers have the final say on who is approved, and this can definitely be challenging and frustrating. Not all lenders deal with all 3 insurers. In fact most lenders deal with only Genworth and CMHC, so sometimes it's a challenge to match up an application that is suited to Canada Guarantee, with a lender that works with CG as well.
What are the costs?
Default insurance is not cheap, and rates have been on the rise the past few years as well. The fees are standard and don't vary lender to lender. They do vary based on down payment type (saved and gifted makes for lower fees than a borrowed down payment) and also based on down payment %. Insurance rates increase with each 5% increment of your down payment. See rate table below.
One important thing to note, is that default insurance fees are included in your mortgage, not paid upfront. So this is not a cost you have to save for when you buy your home additional to your down payment. It's also only paid once for the most part. You pay it when you buy your home, but you don't pay it again when you renew your mortgage in 5 years. There are situations where you'll pay a 'top up percentage' which would be if you were purchasing a new more expensive home and increasing your current mortgage. In which case you'd only pay it on the new funds borrowed.
What else do I need to know about CMHC?
That should generally cover it. Your mortgage broker should be very familiar with default insurer guidelines, options, etc. If your application is strong, you'll likely never even hear about insurer approval except for when your broker is explaining the insurance cost and what it represents.
As always, if you have any questions about mortgage approvals (purchases, refinances, renewals) or real estate purchases, please feel free to call, email, or text.
Mortgage Broker and REALTOR®