Mortgage loan insurance, often referred to as “CMHC insurance” by consumers, is typically required by lenders if the buyers are making a down payment of less than 20% of the home’s purchase price. CMHC is Canada’s premier provider of mortgage loan insurance, but Genworth Financial Canada and Canada Guaranty also offer this service.
In order for the lender to obtain such mortgage loan insurance, they must pay an insurance premium and this cost is passed down to the buyer.
The premium can either be paid in a single lump sum as part of the closing costs or it can be added to the mortgage and included in the monthly payments. The insurance is usually between 0.5 and 2.9% of the total mortgage amount depending on the buyer’s down payment. The higher the down payment, the lower the insurance rate.
Mortgage insurance protects the lender, but does offer advantages to home buyers.
Although this insurance is there to protect the lender against mortgage default and NOT the home buyer, it does offer consumers certain benefits. Most importantly, it allows for home buyers to put down as little as 5% toward a down payment of a home with interest rates that are comparable to those that have a down payment of 20%. This makes home ownership possible for many people who would find it difficult to save 20% for a down payment of a very significant capital asset.
Even though the insurance can be a substantial amount in itself, being able to spread the cost over the life of the mortgage by making payments along with the mortgage payments can make it easier to manage.
In essence, mortgage insurance helps Canadians buy a home sooner and with a lower down payment.
In order to qualify for mortgage insurance, the following requirements must be met:
- The home must be located in Canada
- The down payment must be at least 5% of the price of a single-family or two-unit dwelling (or at least 10% for a three- or four-unit dwelling)
- The monthly housing costs cannot exceed 32% of the gross household income
- The total debt load cannot be more than 40% of the gross household income
Mortgage insurance is often confused with other types of insurance associated with home ownership. Buyers should make sure they know the difference between these products so they are better able to choose the coverage that meets their specific needs.
MORTGAGE INSURANCE IS NOT THE SAME AS:
- Homeowner or Property Insurance: This form of property insurance is designed to protect the individual’s home, and possessions located in the home, against damages due to loss, theft, fire, or other unforeseen disaster.
- Mortgage Life Insurance: This type of insurance is designed specifically to repay any remaining mortgage debt in the event of homeowner death or long-term disability.
If you are looking for a home – and especially if you are a first-time buyer – get informed about mortgage loan insurance as well as other products that will help make your home buying experience as easy as possible. A great place to start is to speak with your professional Realtor.
If you have any questions about mortgages or about home buying or selling, I would be happy to help – please contact me at steve@stevewalsh.ca.
