CMHC insurance, also known as mortgage default insurance, is a type of insurance that is required in Ontario, Canada for home buyers who make a down payment of less than 20% of the purchase price on their home. This insurance protects the lender in the event that the borrower defaults on their mortgage loan. The borrower is responsible for paying the premium for this insurance at the start of their mortgage. CMHC insurance is administered by the Canada Mortgage and Housing Corporation (CMHC), a government-owned corporation that provides mortgage insurance to lenders in Canada
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums.
For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion.
To determine which mortgage default insurance premium rate you have to pay, the first step is to calculate how much your down payment is as a percentage of your home’s purchase price. CMHC calculator tool is linked above to determine your insurance rates.
Let’s say you just purchased a home for $300,000 and made a $40,000 down payment. Your mortgage default insurance premium would be calculated as follows:
Mortgage default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060; this is how much you would need to borrow from your lender in order to purchase your home.
The only way to minimize your mortgage default insurance is by increasing your down payment as a percentage of your home price. To do this, you either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time homebuyer, a tax-free withdrawal from your RRSP, as part of the RRSP Home Buyers’ Plan. Starting in 2023, you’ll also be able to use a new tax shelter, called the Tax-Free First Home Savings Account.
Note that under the changes to CMHC underwriting on July 1st, 2020, you will not qualify for CMHC coverage if you borrow money for a down payment. If borrowing your down payment puts you over the 20% down payment threshold, however, you won’t need CMHC insurance at all.
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