What you need to know about CMHC mortgage insurance

Are you planning to get a mortgage in Canada sometime soon? Are you about to go house hunting? Before you do, you owe it to yourself to brush up on the CMHC (Canadian Mortgage and Housing Corporation) and what they offer in terms of mortgage insurance.

In a perfect world, you’ll have 20% or more saved up for your home down payment. This doesn’t happen in all cases. If you bring less than 20% toward your mortgage down payment, then you’re going to have to pay for CMHC mortgage insurance to protect the lender. This only makes sense because the lender is risking a ton of money on you.

Here is what the CMHC has to say about mortgage 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 starting at 5%* — with interest rates comparable to those with a 20% down payment.”

What do you need to know about CMHC mortgage insurance before you buy a home?

You spend more money when you don’t have the necessary down payment

As tempting as it is to become a homebuyer at an early age, it’s just as important to wait it out sometimes. If you don’t have enough money for that first mortgage, you’re going to find yourself spending money on mortgage insurance.

You won’t have to pay this CMHC mortgage insurance percentage upfront; chances are that you don’t have the money. The lender will pass the cost on to you with your mortgage payments (however you set that up). The issue is that it’s going to cost you even more money on top of everything else to get that home. This is on top of the moving costs, legal fees, and every other possible expense that could pop up.

CMHC helps you buy a home when you don’t have enough money

The reality is that CMHC will help you buy a home when you can’t afford the adequate down payment of 20%. The lender goes to the CMHC to ask for protection. Paying for this protection ensures that you get a mortgage, even without the “skin in the game” that lenders like you to have.

You’re a huge risk to the lender

Think about this: you’re putting down from as little as 5%. That means the lender is risking 95% of the money for your home purchase. That’s a huge risk. This is why they
go to the CMHC for additional protection. They want to ensure that they’re covered in the event that you try to walk away from the mortgage.

You might be getting more home than you can afford

After browsing the CMHC website, I noticed that they mentioned that your total monthly costs shouldn’t be more than 32% of your gross total monthly income. I suggest that you take the time to run the numbers to ensure that you’re not getting in over your head. If you’re looking for a new home, you should use this helpful calculator to help you assess affordability.

The lender pays the CMHC insurance cost

The lender pays the premium upfront. Then they pass the cost on to you. The premium that lenders pay is calculated on a percentage of the home’s price that gets financed by a mortgage. You can pay off the cost in a lump sum or you can add it to your monthly payments when you get a mortgage.

The rules have changed for homes worth over $500,000, so you might have a different situation when your home is on the expensive side. Brush up on CMHC mortgage insurance if you’re planning on buying a home and don’t have enough money saved up for a 20% down payment.