What is CMHC Mortgage Loan Insurance?

The Canada Mortgage and Housing Corporation, often called CMHC, plays a pivotal role in the Canadian housing market. Established decades ago, CMHC is a beacon of stability, ensuring that housing remains accessible, especially when economic tides shift. But what does it mean for the average Canadian homebuyer?

In essence, CMHC insurance acts as a safety net for insured mortgages. If a homebuyer doesn’t have the often-touted 20% down payment, they might be required to get this insurance. It’s a protection for lenders who provide mortgage default insurance but also benefits the buyer indirectly. With CMHC insurance, lenders feel more secure, offering buyers better mortgage rates and conditions. This facilitates smoother, more secure home purchases, even if down payments are on the lower side.

In a rapidly changing housing market, understanding the nuances of CMHC mortgage insurance and its fees can empower you as a buyer, ensuring you make well-informed decisions.

What is the Purpose of CMHC Mortgage Default Insurance?

Navigating the Canadian housing market can sometimes feel like piecing together a jigsaw puzzle. One piece that often piques curiosity is the CMHC mortgage default insurance. But what purpose does it serve, and how does it impact homebuyers and lenders?

CMHC mortgage default insurance, at its core, is designed to shield mortgage lenders from potential defaults. Imagine you, as a homebuyer, suddenly unable to make mortgage payments. The insurance ensures lenders stay high and dry, offering them a safety net. This reduces their risk and makes them more amenable to lending vast sums, often without demanding a sizeable down payment.

From a homebuyer’s perspective, CMHC mortgage default insurance can be a key to more doors. While a fee is associated with this mortgage insurance premium, it also creates more favourable borrowing conditions. Thanks to the added security this insurance provides to lenders, they are often willing to offer mortgages at competitive rates, even if the buyer's down payment is less than the traditional 20%. It's an enabler, allowing more Canadians to step onto the property ladder, even when they might need a hefty down payment saved up.

Additionally, the broader Canadian housing market also benefits from mortgage life insurance. By promoting stability and ensuring that lenders can confidently issue mortgages, the CMHC default loan insurance indirectly supports housing accessibility and affordability. It's not just about individual transactions but fostering a resilient and dynamic Canadian housing environment.

In summary, while the CMHC mortgage default insurance comes with a cost, its purpose goes beyond just fees. It bridges gaps, ensures security, and fosters a healthy, thriving, affordable housing market in Canada.

Pros of Getting a CMHC Mortgage Loan Insurance

CMHC mortgage loan insurance, a common term in the Canadian housing scene, packs several advantages for homebuyers:

• Lower Down Payment: You don't need a hefty 20% down payment to dive into homeownership. With this insurance, even a modest down payment can seal the deal.

• Competitive Mortgage Rates: Lenders often offer better rates to those with CMHC coverage, given the reduced risk.

• Increased Buying Power: The CMHC insurance expands your property options, allowing you to consider homes that might have been out of reach without it.

• Lender's Confidence: The insurance boosts lender confidence, streamlining your mortgage approval process.

• Housing Market Stability: Beyond individual benefits, CMHC insurance promotes a robust Canadian housing market, indirectly enhancing property values and security.

In essence, CMHC mortgage loan insurance isn't just a fee; it's a tool, that empowers your homebuying journey.

CMHC Guidelines as of July 2021

On July 5, 2021, the CMHC adjusted its underwriting standards to align with those of Canada's two private mortgage insurance providers. Key modifications include:

1. A decrease in the minimum credit score required from 680 to 600.
2. An elevation in the maximum permissible debt service ratios: from 35% GDS to 39% GDS and from 42% TDS to 44% TDS.
3. The CMHC maintains its stance against accepting borrowed minimum down payments.

Revised CMHC Criteria:

Credit Score Requirement

At least one applicant must possess a credit score of 600 or higher. This is a revision from the prior requirement of 680.

Down Payment Sources

Borrowing funds for a down payment is no longer permissible. Hence, down payments must originate from personal savings or a non-repayable gift.

Before July 1, 2020, unconventional sources of down payment, like personal loans, were permitted for mortgages that required a down payment between 5% and 10%, given the borrower had at least a credit score 650.

Debt Service Ratios

Debt service ratios (GDS and TDS) gauge one's ability to manage debt payments and housing expenses. With the new changes, the permissible ratios have been adjusted, which may affect the maximum mortgage amount one can qualify for.

• The Gross Debt Service ratio (GDS) — which evaluates housing costs against income — has been revised from 35% to 39%.
• The Total Debt Service ratio (TDS) — which considers housing expenses and other debt obligations against income — has been adjusted from 42% to 44%.

The Real Cost: Breaking Down CMHC Insurance Fees

When diving into the world of mortgages in Canada, you'll often hear about CMHC insurance fees. But what are these fees, and how do they impact your monthly mortgage payments? Let's break it down.

First, it's essential to grasp that CMHC insurance fees, commonly known as premiums, vary. They are mainly influenced by your loan-to-value (LTV) ratio. In simple terms, the LTV ratio measures how much of your home's total value is financed by the mortgage. The higher the ratio, the higher the perceived risk for the mortgage lender, thus, the higher the insurance premium.

Break down based on the Loan-to-value ratio:

• Up to and including 65% LTV:

• Premium on Total Loan: 0.60%
• Premium on Increase to Loan Amount for Portability: 0.60%

• 65.01% to 75% LTV:

• Premium on Total Loan: 1.70%
• Premium on Increase to Loan Amount for Portability: 5.90%

• 75.01% to 80% LTV:

• Premium on Total Loan: 2.40%
• Premium on Increase to Loan Amount for Portability: 6.05%

• 80.01% to 85% LTV:

• Premium on Total Loan: 2.80%
• Premium on Increase to Loan Amount for Portability: 6.20%

• 85.01% to 90% LTV:

• Premium on Total Loan: 3.10%
• Premium on Increase to Loan Amount for Portability: 6.25%

• 90.01% to 95% LTV:

• Premium on Total Loan: 4.00%
• Premium on Increase to Loan Amount for Portability: 6.30%

To paint a clearer picture, consider a home worth $500,000. If you've paid $100,000 as a down payment, the LTV ratio for an insured mortgage is 80%, placing you in the third category mentioned above. Using a CMHC mortgage calculator can help estimate the exact fee based on your specific mortgage amount and your down payment amount.

It's worth noting that while CMHC insurance fees can add to your overall mortgage cost, they also open doors. With this mortgage insurance premium, you will likely get competitive mortgage rates and more flexible terms. So, while it's an added cost, it's also an enabler, helping many Canadians step into their dream homes.

Who is Eligible for CMHC Mortgage Default Insurance?

If you've set aside a down payment that's less than 20% of your potential property's purchase price, you'll typically need CMHC mortgage default insurance. Interestingly, even when your down payment exceeds the standard 20%, certain circumstances might still necessitate you to seek mortgage default insurance.

A less-than-stellar credit score or unconventional income sources, be they inconsistent or non-traditional, might prompt your lender to request that your mortgage be insured before they agree to work with you.

On the flip side, several scenarios could either exempt you from or disqualify you for CMHC mortgage default insurance:

• Larger Down Payments: Generally, if your down payment is over 20% of the property’s cost and you have a decent credit score, you'll likely not need mortgage default insurance.

• Credit Considerations: If your credit score dips too low or if there are significant blemishes in your credit history, you might be ineligible for CMHC coverage.
• Debt-to-Income Ratios: Surpassing the insurer-specified debt-to-income ratio thresholds can make you ineligible.
• High-Value Properties: For properties valued above 1 million Canadian dollars, CMHC mortgage loan insurance is typically optional since the mandatory minimum down payment is already set at 20% for such homes.
• Extended Amortization Periods: Homes with an amortization period beyond 25 years won’t qualify for mortgage default insurance.

Turning Housing Aspirations into Achievements with Pine

Navigating the maze of mortgages can be daunting, especially for first-time home buyers, but with Pine by your side, the path becomes clearer and more attainable. However, with the right guidance, the path becomes more apparent. 

At Pine, we go beyond mere transactions, understanding your unique story and aspirations. Whether you're stepping into your first home or charting new territories in the Canadian housing market, Pine is here to ensure your journey is smooth and informed. Let's transform your housing dreams into tangible realities in Canada's vibrant real estate landscape.