Committed to making your mortgage approval process stress free and efficient for over 25 years, Sunlite Mortgage is one of Toronto, Canada’s leading mortgage brokerages.
If you are a first-time homebuyer, you would have likely heard of Canada Mortgage and Housing Corporation (CMHC). CMHC is the largest of the three mortgage default insurance companies in Canada. The other two are Sagen (formerly Genworth), and Canada Guaranty, the smallest of the three. CMHC mortgage default insurance is required when a buyer is buying a residential property with less than a 20% down payment. It is paid for by the borrower but protects the lender in case the borrower defaults on the mortgage.
The Canada Mortgage and Housing Corporation are a Crown Corporation. The CMHC provides the opportunity to potential homeowners who can obtain a mortgage by offering mortgage default insurance which is mandatory for “high-ratio” mortgages.
In Canada, buyers must contribute a minimum of 5% down payment on the purchase of a home at $500,000 or less, and 10% for any portion of the home price over $500,000 (up to $1 million). Property priced over $1M is not eligible for mortgage default insurance and any home purchase with less than 20% down requires a “high-ratio” mortgage: where the borrower has a high loan-to-value (LTV), meaning 80 – 95% of the property is mortgaged and only 5 – 20% equity is paid into the property. Conversely, a home purchase with more than 20% down is referred to as “low-ratio” is regarded as a conventional mortgage.
Because a high-ratio mortgage is also considered high risk, mortgage default insurance protects the lender’s financial interests if a borrower cannot make their mortgage payments. Premiums for mortgage default insurance are added to the mortgage principal and amortized over 25 years.
During your mortgage qualification process, the lender that you apply for a mortgage from will, in turn, apply for CMHC on your behalf for the insurance. These terms and conditions have to be followed so be sure to ask your Sunlite Mortgage agent what is required for your application to be approved.
Your lender pays an insurance premium on mortgage loan insurance, which is calculated as a percentage of the mortgage and based on the size of your down payment. Your lender will then pass this cost on to you which you can either pay as a lump sum or include in your mortgage payments.
Insurance premiums are set by the CMHC and will increase according to your LTV. We have listed the current premiums below, but please note that they can change over time:
| Loan-to-Value | Premium on Total Loan | Premium on Increase to Loan Amount for Portability |
|---|---|---|
| Up to and including 65% | 0.60% | 0.60% |
| Up to and including 75% | 1.70% | 5.90% |
| Up to and including 80% | 2.40% | 6.05% |
| Up to and including 85% | 2.80% | 6.20% |
| Up to and including 90% | 3.10% | 6.25% |
| Up to and including 95% | 4.00% | 6.30% |
For example, a buyer purchasing a $500,000 home, putting 5% down ($25,000), amortized over 25 years would pay an additional 4% ($19,000) in insurance premiums over the term of the mortgage. Of course, putting a full 20% down ($100,000) would remove this additional cost from your monthly payments altogether.
CMHC offers mortgage loan insurance products on various property types, beyond single-family residential properties. Coverage can apply to duplexes, condos, mobile homes, rental properties and even retirement homes.
Mortgage default insurance stabilizes the housing market during economic slumps, ensuring the availability of mortgage funding when down payments are harder to save for. Ultimately, CMHC default insurance looks out for potential homeowners, giving everyone an equal shot at getting their foot in the door.
