How to Avoid CMHC Fees
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Buying a home is a huge financial investment that comes with a plethora of expenses. Your mortgage will likely be one of the largest monthly payments you’ll need to cover. But your mortgage can be even more expensive because of a little thing called mortgage default insurance.
Want to learn more about bi-weekly vs. monthly mortgage payments? Click here.
This extra payment will be tacked on to your mortgage if your loan amount is more than 80% of the purchase price. Putting it in a different way, if you’re planning to take out a mortgage with less than a 20% down payment, be prepared to pay CMHC insurance or mortgage default insurance.
For more information about high ratio mortgages and default mortgage insurance, look here.
What is CHMC Mortgage Insurance?
Mortgage default insurance is mandatory for Canadian buyers who have down payments less than 20% of the purchase price. This type of insurance policy is designed to protect lenders in case borrowers default on their mortgage and is provided by three mortgage default insurance providers, Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial.
CMHC is the biggest mortgage insurance provider and is actually a crown corporation, even though it is operated as a private company. As such, CMHC is governed by a federal Board of Directors which manages how CMHC conducts its business in accordance with federal law. Given its commonality, CHMC is typically the term used for mortgage default insurance.
The other two mortgage insurers are private companies, each of which determines their own set of rules regarding the types of mortgages that they agree to insure and the requirements for such mortgages.
These entities provide the same type of services, which is why it doesn’t really matter much which insurance provider to go with. Having said that, you probably won’t be given a choice of which provider to use anyway. In fact, you likely won’t even know which provider is supplying your insurance unless you specifically inquire about it.
If it wasn’t for this type of insurance, many borrowers would be turned down for a mortgage. That’s because lenders don’t want to assume any more risk than necessary when approving a borrower for a mortgage. In their eyes, the smaller down payment you have, the more of a risk you are to them. In this way, mortgage default insurance can be seen as somewhat beneficial for borrowers as well as lenders.
How much should you save for a downpayment? Check out this infographic to learn how much it costs to buy a house in your city.
How Much Does Mortgage Default Insurance Cost?
Mortgage default insurance doesn’t come for free. Like other types of insurance policies, there’s a cost associated with it. This insurance fee is tacked onto monthly mortgage payments in addition to the principal and interest portion.
The cost associated with mortgage default insurance depends on how much of a down payment you’re putting toward your home purchase and typically falls within the range of 2.8% to 4% of the amount of the mortgage.
The more you put toward your down payment, the less you’ll be charged. Calculating your particular mortgage default insurance can be done using the following figures:
- 5% – 9.99% down payment: 4.00%
- 10% – 14.99% down payment: 3.10%
- 15% – 19.99% down payment: 2.80%
So, if you’re putting a 10% down payment on a $600,000 home purchase ($60,000), you’ll have a mortgage of $540,000. Based on a 3.10% mortgage default insurance rate (since you fall within the 10% – 14.99% category), your insurance premium would be $16,740 ($540,000 x 3.10%). This amount would then be added to your mortgage amount, which means you’d have a total mortgage amount of $556,740.
Clearly, the more you put down, the less you’ll have to pay toward mortgage default insurance. In this case, you may want to look at more affordable homes or tap into other financial sources, such as your RRSPs (if you’re a first-time homebuyer) in order to beef up your down payment and take advantage of a lower mortgage default insurance rate.
Need to save up for a down payment? Read this first.
How Are CMHC Insurance Payments Made?
Generally speaking, mortgage default insurance is financed through and added to your mortgage. You don’t have to come up with a huge lump sum payment to pay this fee off like you would with other common closing costs associated with a home purchase, such as land transfer taxes. Mortgage default insurance is repaid over the life of the mortgage.
Using the above example, you would be paying mortgage payments based on a total home loan amount of $556,740 rather than the initial $540,000 as would be the case had you put down at least 20%.
What happens if you miss a mortgage payment? Find out here.
Can You Avoid or Eliminate CMHC Premiums?
Mortgage insurance is automatically worked into your mortgage when you put less than 20% down towards the purchase price. There is a way to avoid paying this type of mortgage, by putting a minimum of 20% as a down payment. It’s also possible to avoid CMHC insurance if you refinance your mortgage and leave at least 20% in the home.
You may be able to save money by requesting a shorter amortization period. Generally speaking, the longer the amortization period, the higher the risk for the lender. As such, the insurance premium will likely be higher. Basically, higher risk equals higher fees.
What’s the difference between a mortgage term and a mortgage amortization? Click here.
CMHC insurance premiums can also be reduced or even eliminated if you move to another house thanks to a “portability option.” This helps to reduce or get rid of the premium on a new insured mortgage to buy another house. That said, it’s important to check with your lender to find out the exact terms and conditions of mortgage portability for a particular mortgage package.
To learn more about portable mortgages, read this.
The Bottom Line
While mortgage insurance might sound like a pain, it can actually help you get approved for a home loan that you might not otherwise be able to get. It can also help you obtain a slightly lower interest rate as the lender is protected under these policies. That said, the more money you can put towards your down payment, the less you’ll have to pay in the form of mortgage insurance.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.