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Mortgage Default Insurance (CMHC)

Mortgage default insurance protects lenders, like banks, from losses in the event of a default on a mortgage by the borrower. It is required for all mortgages where the down payment is less than 20% of the property value. Based on the size of your down payment the Canada Mortgage Housing Corporation (CMHC), or other mortgage default insurance provider, calculates the total cost of the insurance as a percentage of your mortgage loan. Typically this is between 2.50% and 4.00% of the property value.

The total cost of the mortgage default insurance depends on the size of your down payment and the total value of the property. The greater the down payment the lower insurance cost, giving you an incentive to have a larger down payment. The insurance can be paid back in installments, sometimes combined with your mortgage payments, or in a lump sum.

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    What is Mortgage Default Insurance (CMHC)?

    Mortgage Default Insurance, which is sometimes referred to as CMHC insurance, is a type of insurance that protects lenders like banks and credit unions in the event that the borrower cannot make the mortgage payments and the loan is defaulted on. It is offered by three mortgage default insurance providers in Canada, the Canada Mortgage Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial. Mortgage default insurance is required in Canada for mortgages that have a downpayment of between 5% and 19.99% of the property value. Mortgage loan insurance helps keep the housing market stable by allowing the purchase of homes with a mortgage loan that is 95% of the property value, giving many people the opportunity to purchase a home even in more difficult times when saving up for a down payment can be difficult.

    How Does Mortgage Default Insurance (CMHC) Work?

    If your down payment is less than 20% of the property value you are required to have mortgage default insurance. The lower your down payment is, the greater the insurance is. If your down payment is greater than 20% you do not need mortgage default insurance. The minimum down payment required is determined by the value of the property:
    • Less than $500,000: If the property costs $500,000 or less, the minimum down payment is 5%.
    • Between $500,000 and $1000,000: If the property cost is greater than $500,000, you need a minimum of 5% down on the first $500,000 and 10% for the amount above the first $500,000.
    • Greater than $1,000,000: If the property costs $1,000,000 or greater, mortgage loan insurance is not available and a minimum down payment of 20% is required.
    The overall cost of the insurance is typically between 2.50% to 4.00% of the mortgage amount although in some situations it may be outside that range. The cost of your mortgage default insurance depends on your initial down payment and is usually paid in installments combined with your mortgage loan repayments, it can also be paid in a lump sum. While the default insurance can be a tool that allows you to purchase a home with a smaller down payment there is an incentive to increase your down payment to reduce or eliminate the insurance cost.

    Who would benefit from an interest Only Mortgage?

    There are certain situations in which getting an Interest Only Mortgage is more advantageous to a borrower than a traditional loan. For instance, someone who is planning to resell a property that they recently purchased in a short period of time would find an Interest Only Mortgage more suitable for their needs. Interest Only Mortgages are also a good option for people who experience frequent fluctuations in their monthly cash flow and need significant flexibility in their mortgage payments. There are also options for those who are denied mortgages at banks to be able to apply for Interest Only Mortgage, however, lenders who are aware of this will typically increase mortgage rates for lack of competition.

    Tips for Getting a Mortgage Default Insurance

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    What is Required for Mortgage Default Insurance (CMHC)?

    Purchasing mortgage default insurance is necessary for all property purchases that have less than 20% down payment but there are some additional requirements:

    • The maximum amortization period cannot exceed 25 years for insured mortgages
    • The minimum down payment required is 5% for properties valued less than $500,000.
    • If the property value exceeds $500,000 the minimum down payment is 5% of the first $500,000 and 10% of the amount exceeding that up to a maximum of $999,999.
    • If the property is valued at $1 million or more the down payment must be at least 20% and mortgage default insurance is not available.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    Mortgage default insurance protects lenders from losses in the event of a default on a mortgage. This occurs when the borrower has defaulted the mortgage loan agreement. The cost of the insurance is typically between 2.50% and 4.00% of the property value and is added to the mortgaged amount.
    Based on the size of your down payment the CMHC or other mortgage default insurance provider calculates the total cost of the insurance as a percentage of your mortgage loan. The greater the down payment the lower insurance. It can be paid back in installments or a lump sum.
    The total cost of the mortgage default insurance depends on the size of your down payment and the total value of the property. Typical rates are between 2.50% and 4.00% of the property value. The lower the down payment the greater the cost of the insurance, giving you an incentive to have a larger down payment.
    The premiums paid on your mortgage default insurance are not refundable and should be factored into your total expenses for your home. If your home is eligible for the green rebate you may be able to receive up to 15% of your premiums back as a rebate.

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