We get it. Extra fees, premiums, varying interest rates are annoying. What do they even mean? What is their role in a mortgage? Today let’s break down the concept of insured mortgages, a.k.a. CMHC premiums.
What is a CMHC insured mortgage?
An insured mortgage is a mortgage that is protected by CMHC insurance. The insurance protects the lender, not the borrower, in the off chance there is (1) a default on the loan, (2) payments are no longer being made, and/or (3) there is a shortfall once the property has been sold.
In Canada, mortgage insurance is provided through the Canada Mortgage and Housing Corporation – a federal government crown corporation. So, when you see “CMHC insurance” or “insured mortgage,” just know they are both the same concept through the same organization.
The goal of the CMHC is to make housing more affordable for Canadians by providing funding, knowledge, research, and expertise. One method they utilize to make housing mor affordable is by offering a required 5% minimum down payment on properties less than $500k.
When is an insured mortgage required?
CMHC insured mortgages are required on all properties with a down payment of less than 20%. Why? Because you are borrowing a larger sum of money to finance the property, it helps protect the lender in the case where you are no longer to continue paying the mortgage. However, the minimum down payment required varies depending on the value of the property.
• If the property costs less than $500,000, you need a minimum down payment of 5%
• If the property costs more than $500,000, you need a minimum down payment of 5% on the first $500,000 and 10% on the remainder
If the property costs more than $1M, CMHC insurance is not available. This means that you will need a down payment of at least 20% on these properties.
What are some parameters of a CMHC insured mortgage?
The CMHC mortgage insurance premium you pay depends on the down payment. As of 2022, here is the premium based on the property’s loan-to-value:
• Up to and including 65% – 0.6% standard CMHC purchase premium
• Up to and including 75% – 1.7% standard CMHC purchase premium
• Up to and including 80% – 2.4% standard CMHC purchase premium
• Up to and including 85% – 2.8% standard CMHC purchase premium
• Up to and including 90% – 3.1% standard CMHC purchase premium
• Up to and including 95% – 4% standard CMHC purchase premium
Additionally, if your mortgage is insured through CMHC, the maximum amortization period allocated is 25 years. However, if you go with an uninsured mortgage, you can have an amortization period of up to 30 years.
To qualify for CMHC mortgage insurance, your total monthly housing costs cannot exceed 32% of your gross (before-tax) household income. Meaning, if your combined household income is $100k, housing costs cannot exceed $32k; roughly $2666 per month.
Finally, for residential mortgages in Canada, you can only have one homeowner CMHC-insured mortgage at a time. This means that you cannot get a second CMHC-insured mortgage for a second property – like a rental or vacation home.
The idea of paying a premium on your mortgage can be scary. However, mortgage insurance is great for individuals and households looking to enter homeownership with a smaller budget. With CMHC insurance, you only need to save up 5% for a down payment if the value of the property is less than $500k. Or it’s great for those looking to begin homeownership sooner than they thought!
CENTUM is here for you! Reach out to us today and let’s get chatting about your mortgage options.