Mortgage insurance CMHC for small down payment
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CMHC Mortgage Insurance

CMHC Mortgage Insurance

Many mortgage borrowers are unfamiliar with this term or think that it is the same as a mortgage insurance or life insurance. They are different. (To know more about mortgage or life insurance, check out this previous blog post). So, what is CMHC mortgage insurance? Who needs it? What are the benefits? 

Essentially, if you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments. This is how it works: when lenders receive your application for a mortgage from a borrower who has less than 20% – these borrowers are also designated as high-ration borrowers -, they need to put in place an insurance – name after these borrowers, in other words a high-ratio mortgage-default – from one of the three insurers. These insurers are Canada Mortgage and Housing Corporation (CMHC), Genworth and Canada Guaranty. Due to the fact of CMHC being the biggest one, the insurance is usually referred to it by its name. 

How does it work?

Since the borrower has less than 20% downpayment, there are a set of rules both the borrower and the lender need to obey.  This type of insurance comes with a government guarantee, which connects them to the scrutiny of the federal ministry of finance.  This type of mortgage exists to ensure that the borrowed money is not exposed to undue risks.  Basically, if you want to buy a property with a down payment of less than 20% of the purchase price, you need to buy insurance to protect the lender against loss if you default on your payments.  You still have a debt obligation if you default, but the lender is protected. 

Benefits

  • You may borrow up to 95% of the purchase price of a home. 
  • It allows you to get a reasonable interest rate, even with a small down payment. 

Things to know

  • The amount you are charged increases as your down payment decreases.
  • You can roll the fee into your mortgage but you have to pay any associated taxes upfront, as part of your closing costs.
  • You may transfer this insurance to a different lender if you find a better deal at renewal.
  • You only have to pay an insurance fee on the additional amount borrowed in case you need to increase your original mortgage amount. 

Do you still have questions? Contact us!