Understanding CMHC/Mortgage Default Insurance

Whether you’re a first-time buyer or making a strategic real estate move, understanding mortgage default insurance is crucial to navigating this journey confidently.

What is Mortgage Default Insurance?

Mortgage default insurance is a (sometimes) mandatory insurance policy that protects lenders if a borrower defaults on their mortgage payments. 

The Canadian Mortgage and Housing Corporation (CMHC) is the most commonly known mortgage default insurer in Canada, though insurance can also be obtained through Genworth Canada and Canada Guaranty. 

Mortgage default insurance is required when the down payment on a home is less than 20% of the purchase price. This insurance mitigates the risk for lenders, allowing them to offer mortgages with lower down payments, making homeownership more accessible.

It’s important to understand that while the homeowner pays the mortgage default insurance premium, the insurance is for the lender, and they are the only ones who can make a claim against the policy.

When is CMHC Needed?

1. Down Payment Less than 20%: Mortgage default insurance is primarily required if your down payment is less than 20% of the home’s purchase price.
2. Self-Employed Individuals: If you’re self-employed, lenders may require mortgage default insurance even if you have a substantial down payment. This is because self-employment can sometimes present challenges in demonstrating stable income.
3. High-Risk Borrowers: Borrowers with lower credit scores or those with a history of missed payments might also be required to obtain CMHC/mortgage default insurance, even if their down payment is greater than 20%.
4. Secondary Properties: CMHC can also apply to certain types of secondary properties, especially if they’re used for investment purposes and the down payment is less than 20%.

Who Pays CMHC/Mortgage Default Insurance?

While your lender pays the insurance premium, they pass 100% of the cost onto the borrower. It can either be paid upfront or added to your monthly mortgage payment. 

How Much Does CMHC Insurance Cost?

The cost of CMHC is calculated as a percentage of your mortgage amount and depends on the size of your down payment. Here’s how the premiums break down based on your down payment:

Here’s how the CMHC Premium changes based on downpayment on a $750,000 home:

• 5% downpayment: $23,250
• 10% downpayment: $21,000
• 15% downpayment: $18,000

How Do I Apply for Mortgage Default Insurance?

When you apply for a mortgage, your lender arranges for mortgage insurance, if necessary. The premium can usually be added to your mortgage payments or paid upfront. While it’s a one-time payment, it can add thousands of dollars to your overall mortgage cost.

CMHC Qualification Criteria

To qualify for CMHC mortgage default insurance:

• The home must be located in Canada
•  The maximum purchase price must be below $1,000,000 until December 15, 2024, when the maximum price increases to $1,500,000. 
• You typically need a minimum down payment of 5% for the first $500,000 of the purchase price and 10% of the remainder. 
• The minimum downpayment must come from your own resources. A gift from an immediate relative is acceptable for homes that have fewer than four units.
• Your total monthly housing costs, including mortgage payment (principal+ interest), property taxes, heating and 50% of condo fees shouldn’t represent more than 32% of your gross household income. 
• Your total debt load shouldn’t be more than 40% of your gross household income. That means that your mortgage payment (principal and interest) + property taxes + heating + 50% of condo fees + all payments on other debt must be no more than 40% of your total household income.

It’s also important to note that your lender will use your credit score and history of stable income to qualify you for a mortgage. Not all property types qualify for mortgage default insurance – for example, commercial properties or homes requiring extensive repairs may not be eligible. Talk to your lender. 

When buying a home, it’s important to know if CMHC/mortgage default insurance is required so you can budget for it. As always, it’s wise to consult with a knowledgeable real estate agent and financial advisor to tailor your strategy to your situation.

FAQ about Mortgage Default Insurance

1. Can CMHC premiums be avoided? CMHC is mandatory for mortgages with less than 20% down payment. However, alternative insurance options exist, such as those offered by private insurers.
2. Is CMHC the same as mortgage life insurance? No, CMHC protects lenders, not borrowers. Mortgage life insurance, on the other hand, pays off the mortgage if the borrower dies.
3. Can CMHC be refunded? CMHC premiums are non-refundable once paid, even if the mortgage is paid off early.
4. Are CMHC fees tax-free? You have to pay HST on the premiums. Note this amount is paid upfront and cannot be added to your mortgage payment. 
5. How Do I Apply for CMHC? Your lender will handle the CMHC application process. Ensure you understand the terms and conditions before signing.