Why You Need CMHC Insurance

Family Home

CMHC provides mortgage default insurance to the lender in case the borrower defaults and there isn’t enough money after a sale to pay-out the mortgage.  There are 2 other Canadian mortgage default insurers in Canada that provide identical products, Genworth Financial and Canada Guarantee.

Regulated financial institutions are prohibited from lending beyond 80% of the value of your home unless they obtain this mortgage default insurance.  Although this premium is very expensive, it’s a one-time payment and will be capitalized to your mortgage so you don’t have to come up with the funds out of pocket.  The premiums range from 1.75% of the mortgage amount for a 15% downpayment to 2.75% for a 5% downpayment.  If you’re buying for $500,000 with only 5% down, then you’ll be faced with an insurance premium of over $13,000.

Recent rule changes imposed by OSFI (Office of the Superintendent of Financial Institutions) now require mortgage default insurance by one of the 3 mortgage default insurers for self-employed borrowers with less than 35% cash downpayment unless they can verify their income through traditional means.  Not an easy feat for many self-employed Canadians.  The mortgage insurance premium with a 20% cash downpayment for a self-employed borrower is 1% of the mortgage balance.

The mortgage regulators are the ones that require CMHC, or any mortgage default insurance, be added to a mortgage if they feel the risk is too high for the financial institution.  The financial institution gets the protection, but you the borrower must pay for the cost of the insurance.

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