CMHC insurance explained: what it costs and why it exists

If you're like many first-time homebuyers in Canada, especially here in Metro Vancouver, the idea of a 20% down payment can feel like a distant dream. Saving up that much can take years, and with property values being what they are, it often seems like the goalpost keeps moving. That's where CMHC insurance, or mortgage default insurance as it's more broadly known, comes into play. It's a crucial component that helps many Canadians achieve homeownership sooner, and understanding it is key to navigating your mortgage journey.

I often explain to my clients that mortgage default insurance isn't for you in the way that home insurance protects your property. Instead, it protects the lender (the bank or financial institution) in case you, the borrower, can no longer make your mortgage payments. This protection allows lenders to offer mortgages to individuals with down payments of less than 20% – as low as 5% for a portion of the purchase price. Without this insurance, lenders would face a much higher risk, and it would be significantly harder for many Canadians to get a mortgage.

Who Provides Mortgage Default Insurance in Canada?

While "CMHC insurance" is the most common term you'll hear, it's important to know that there are actually three providers of mortgage default insurance in Canada:

• CMHC (Canada Mortgage and Housing Corporation): This is a Crown corporation, meaning it's owned by the federal government. It's the largest provider of mortgage default insurance in Canada.
• Sagen™ (formerly Genworth Canada): A private company that also offers mortgage default insurance.
• Canada Guaranty: Another private mortgage default insurance provider.

For the most part, the rules and costs are very similar across all three providers. When you apply for a mortgage with less than 20% down, your lender will typically work with one of these insurers to secure the necessary coverage.

How Does Mortgage Default Insurance Work?

When your down payment is less than 20% of the home's purchase price, your mortgage is considered a "high-ratio" mortgage. Canadian regulations require all high-ratio mortgages to be insured against default. This is where CMHC, Sagen, or Canada Guaranty step in.

The cost of this insurance is passed on to you, the borrower, in the form of a premium. This premium is calculated as a percentage of your total mortgage amount. The exact percentage depends on the size of your down payment – specifically, the loan-to-value (LTV) ratio. The smaller your down payment (and thus the higher your LTV), the higher the insurance premium percentage will be.

Here's a breakdown of how it generally works:

• Premium Calculation: The premium is added directly to your mortgage principal. This means you don't pay it upfront as a lump sum out of pocket; instead, it's amortized over the life of your mortgage, and you pay interest on it just like the rest of your mortgage.

What Does Mortgage Default Insurance Cost?

The premium rates are set by the insurers and are subject to change. They are based on your loan-to-value (LTV) ratio. Generally, the higher your LTV (meaning the lower your down payment), the higher the premium rate.

Here's a general idea of the premium structure, though it's crucial to get the most current figures when you're applying:

Important Note for BC Buyers: In British Columbia, there is also a provincial sales tax (PST) on the mortgage default insurance premium. This PST is not added to your mortgage and must be paid upfront at the time of closing. This is an important closing cost to budget for! For example, if your premium is $19,530 and the PST rate is 7%, you would need to pay $1,367.10 (7% of $19,530) out of pocket on your closing date.

Benefits of Mortgage Default Insurance

While paying an extra premium might seem like a drawback, mortgage default insurance offers significant advantages, especially for first-time buyers:

1. Lower Down Payment Requirements: This is the most obvious benefit. It allows you to enter the housing market with as little as 5% down, which can be a game-changer in high-cost areas like Metro Vancouver.
2. More Competitive Interest Rates: Because the lender's risk is reduced by the insurance, they are typically able to offer you lower interest rates on your mortgage. An uninsured mortgage (with 20% or more down) might have a slightly higher interest rate, though this isn't always the case and depends on market conditions.
3. Increased Purchasing Power: By reducing the down payment hurdle, you might be able to purchase a home sooner or in a more desirable location than if you had to save for a full 20% down payment.
4. Access to Longer Amortization Periods (Historically): While current rules have standardized amortization periods for insured and uninsured mortgages, historically, insured mortgages often had access to longer amortization periods, which could lower monthly payments. Always check current regulations.

When is Mortgage Default Insurance Not Required?

You will not need mortgage default insurance if:

• Your Down Payment is 20% or More: This is the primary threshold. If you put 20% or more down, your mortgage is considered "conventional" or "uninsured."
• The Purchase Price is Over $1 Million: Mortgages on properties purchased for $1 million or more are not eligible for mortgage default insurance in Canada, regardless of the down payment amount. This means you must have a 20% down payment for properties in this price range.
• The Property is Not Your Primary Residence: Investment properties or secondary homes typically have different lending criteria and may not be eligible for standard mortgage default insurance.
• The Amortization Period Exceeds 25 Years: For insured mortgages, the maximum amortization period is generally 25 years. If you opt for a longer amortization period (only available for uninsured mortgages), you won't be able to get mortgage default insurance.

Navigating the Stress Test with Mortgage Default Insurance

FAQ

Q: Does CMHC insurance protect me if I can't make my mortgage payments? A: No, this is a common misconception. Mortgage default insurance protects the lender, not you, the borrower. If you default on your mortgage, the insurer compensates the lender for their losses. You would still be responsible for the debt, and your credit would be negatively impacted.

Q: Can I avoid paying the PST on the CMHC premium in BC? A: Unfortunately, no. In British Columbia, the provincial sales tax (PST) on mortgage default insurance premiums is a mandatory closing cost that must be paid upfront. It cannot be added to your mortgage.

Q: What happens to my CMHC insurance if I refinance my mortgage? A: If you refinance your mortgage, especially if you are increasing the loan amount or changing lenders, you will likely need to re-qualify for mortgage default insurance if your loan-to-value ratio is still above 80%. A new premium may be charged, or the existing one may be portable, depending on the specifics of your refinance and the insurer's rules at that time.

Understanding CMHC insurance is a vital step in your homeownership journey, especially if you're working with a down payment under 20%. While it adds to your overall mortgage cost, it also opens the door to homeownership much sooner for many Canadians.

Ready to explore your mortgage options and see how CMHC insurance might fit into your plan? Take the first step today with my free 2-minute free intake for me to review at free intake for me to review or give me a call directly at 778-222-7109.

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