Purchasing a home is one of the biggest investments you can take on in your life. The mortgage amount will most likely be on of the largest payments you will have to commit to monthly, and it can get even higher with the mortgage default insurance.

If your loan is more than the 80% of the purchasing price, the mortgage default insurance will be added to your mortgage. In other words, if you want to take on a mortgage that is less than a 20% down payment, you will be charged the mortgage default insurance, also known as CMHC insurance.

CMHC is mandatory for all home buyers who have down payments less than 20% of the purchase price. This insurance policy is put in place in order to protect lenders if the borrower fails to repay the mortgage. There are three mortgage default insurance providers:  Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial. However, CMHC is the largest mortgage insurance provider, and that’s why CMHC term is used for mortgage default insurance. CMHC is also operated as a private company, even tough it is a crown corporation, and conducts its business in agreement with the federal law.

Since all of the 3 companies provide the same type of service, it really doesn’t matter which provider to go with when choosing insurance. In addition to that, you probably won’t have a say regarding which provider to pick anyways, and also most likely not know which provider is supplying your insurance, unless you specifically inquire about it.

Many individuals wouldn’t get their mortgages approved if it wasn’t for this type of insurance. This is because lenders do not want to take on any more risk when they approve a mortgage. With that said, mortgage default insurance can be beneficial for both lenders and borrowers.

CMHC cost and how to make the payments

The insurance fee is added to the monthly mortgage payments and also added to the principal and interest portion. The cost is calculated depending on the down payment amount towards your purchase. In other words, the more you put towards the down payment, the less insurance fee will be charged. Here are the breakdowns in order to calculate the insurance fee:

  • 5% – 9.99% down payment: 4.00%
  • 10% – 14.99% down payment: 3.10%    
  • 15% – 19.99% down payment: 2.80%

Regarding payments, usually they are financed through and added to your mortgage payed over the life of the mortgage.

While mortgage insurance might sound like an unnecessary cost, it can actually help you to get approved for a home loan that you might not be able to get otherwise. It can also help you obtain a slightly lower interest rate as the lender is protected under these policies. In conclusion, the more you can put towards your down payment, the less you’ll have to pay in the form of mortgage insurance.

If you are looking to refinance or purchase a home over the next few months, contact us today at 877-296-2696 or email us at info@homemortgageadvice.ca.