Purchasing a home is an exciting but significant financial investment that comes with various expenses, and the mortgage payment is one of the most substantial monthly costs. However, for Canadian buyers who provide a down payment of less than 20% of the purchase price, mortgage default insurance must be paid, which can make the mortgage even more costly. This insurance policy protects lenders in the event that borrowers default on their mortgage and is provided by three mortgage default insurance providers, including the largest provider, Canada Mortgage and Housing Corporation (CMHC).
What is Mortgage Default 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. The cost of this insurance fee is added to monthly mortgage payments and ranges between 2.8% to 4% of the mortgage amount, depending on the down payment provided.
While they provide similar services, there are some differences in terms of their underwriting guidelines and premium rates. Here’s a comparison of some key features of these three providers:
| Feature | Canada Mortgage and Housing Corporation (CMHC) | Canada Guaranty | Genworth Financial |
|---|---|---|---|
| Minimum Down Payment | 5% | 5% | 5% |
| Maximum Amortization Period | 25 years | 25 years | 25 years |
| Maximum Home Purchase Price | None | $1,500,000 | $1,250,000 |
| Premium Rate for Minimum Down Payment | 4.00% | 4.00% | 4.00% |
| Premium Rate for Down Payment of 10% to less than 15% | 3.10% | 3.10% | 3.10% |
| Premium Rate for Down Payment of 15% to less than 20% | 2.80% | 2.80% | 2.80% |
| Credit Score Requirement | No specific requirement, but lenders may have their own | No specific requirement, but lenders may have their own | No specific requirement, but lenders may have their own |
As you can see, the three providers have similar underwriting guidelines and premium rates. However, Canada Guaranty has a maximum home purchase price of $1.5 million, while Genworth Financial has a maximum home purchase price of $1.25 million. It’s also worth noting that while these providers offer mortgage default insurance, borrowers may not have a choice in which provider to use, as lenders may work with only one provider or have a preferred provider.
Examples of how CMHC insurance premiums are calculated:
Example 1: Home Purchase Price: $500,000 Down Payment: 5% ($25,000) Mortgage Amount: $475,000 CMHC Insurance Premium Rate: 4.00% CMHC Insurance Premium: $19,000 (4.00% of $475,000) Total Mortgage Amount: $494,000 ($475,000 + $19,000)
Example 2: Home Purchase Price: $700,000 Down Payment: 10% ($70,000) Mortgage Amount: $630,000 CMHC Insurance Premium Rate: 3.10% CMHC Insurance Premium: $19,530 (3.10% of $630,000) Total Mortgage Amount: $649,530 ($630,000 + $19,530)
Example 3: Home Purchase Price: $1,000,000 Down Payment: 20% ($200,000) Mortgage Amount: $800,000 No CMHC Insurance Premium
As you can see from these examples, the CMHC insurance premium rate decreases as the down payment amount increases. It’s also important to note that the premium is added to the mortgage amount, which increases the overall cost of the mortgage. Additionally, the premium is typically spread out over the life of the mortgage, which means borrowers will be paying interest on the premium as well. This is why it’s important for homebuyers to carefully consider their financial situation and determine what down payment they can comfortably afford, as a larger down payment can save them money in the long run by reducing the amount paid in CMHC insurance premiums.
The Benefits of Mortgage Default Insurance
While mortgage default insurance increases the overall cost of the mortgage, it can help borrowers secure a home loan they might not otherwise qualify for and even result in a lower interest rate. For lenders, this insurance policy offers protection in the event of borrower default. In addition, the payment for mortgage default insurance is typically added to the total mortgage amount and repaid over the life of the mortgage, making it easier for borrowers to manage their finances.
How to Reduce CMHC Insurance Premiums
Borrowers can reduce their CMHC insurance premiums by providing a larger down payment. A down payment of at least 20% will eliminate the need for mortgage default insurance. In cases where a larger down payment is not feasible, borrowers can explore options for reducing their CMHC insurance premiums. For example, they may request a shorter amortization period or explore the portability option. The portability option allows borrowers to transfer their mortgage insurance to a new home, potentially reducing or eliminating the premium on a new insured mortgage. However, borrowers should check with their lender to understand the specific terms and conditions of mortgage portability.
Understanding Other Costs Associated with Purchasing a Home
Mortgage default insurance is just one of several costs associated with purchasing a home. Homebuyers should also be aware of other costs such as land transfer taxes, legal fees, and home inspection costs. By understanding these costs and factoring them into their budget, homebuyers can make informed decisions about their home purchase and avoid financial surprises down the line.
Mortgage default insurance is a necessary cost for many homebuyers and offers benefits to both lenders and borrowers. By understanding how CMHC insurance premiums are calculated and exploring options for reducing them, borrowers can make informed decisions about their homebuying journey. Homebuyers should carefully consider their financial situation and determine what down payment they can comfortably afford. In addition, they should factor in the cost of mortgage default insurance and other associated costs to ensure a successful homebuying journey.