As a Toronto mortgage broker working with home buyers, I’m often asked: “Do I need to pay for the CMHC (Canada Mortgage & Housing Corporation) insurance?” If you’re purchasing with less than a 20% downpayment, the short answer is “yes”.
I understand, as a Toronto homebuyer myself, the premium paid up front for the benefit of a mortgage lender seems unfair. While the couple of thousand dollars added on to the mortgage is discouraging, you could look at it this way: the extra expense over the course of an average mortgage is approximately $20 per monthly payment. Without the extra CMHC insurance, you probably wouldn't be able to buy or refinance your home unless you came in with a 20% downpayment. Assuming you could buy with less than 20% down, your mortgage interest rate would be higher because a mortgage lender would make you pay for their exposed risk.
In Canada, it’s because of CMHC that lenders are willing to lend to borrowers who buy without large downpayments. In the not to recent past, Canadian homebuyers had to come in with a much larger downpayment and this is still going on in many other countries today where there is insurance is not available. In some countries, homebuyer need to buy with a 25% to sometimes 50% minimum downpayment.
The CMHC insurance is a one time premium that is added up front on top of your mortgage (you do not have to pay for it out of pocket) and insures the lender if default occurs. Although it seems like real estate is a forever increasing asset this is not always true. Markets can turn very quickly. As we recently saw in the U.S. after legal fees, real estate fees and market corrections, a lender can easily lose money if there is not enough equity or downpayment.
The insurance premium is determined by a table depending on how much downpayment you bring to the purchase. http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm For example:
5% down- 2.75%
10% down - 2.00%
15% down -1.75%
In addition, there is a 0.2% premium that is added for each additional 5 years that is added to the mortgage amount above a 25 year amortization. You should also be aware that included in your closing costs there is the standard Ontario PST.
Sure, it does seem a little discouraging and frustrating to have to pay this premium on top of all the other fees that you incur as a home buyers but it serves a very important purpose to keep the rate low and give you the opportunity to own with less than 20% down. The couple thousand dollars that gets added on top of the mortgage makes a difference of about $20 each monthly payment. In retrospect, it's a small price to pay for the satisfaction and pride of owning your own home.
If you have any additional questions, feel free to contact me. Chris Molder, Toronto Mortgage Broker. 416.461.0204