What is CMHC Mortgage Insurance?

Anyone can put 5% down when they purchase a home, not just first time home buyers. You just have to qualify for mortgage default insurance. This is where CMHC (Canada Mortgage and Housing Corporation) comes in.

If you tell a mortgage broker you only want to put 5% down, they’ll know to find you an “insured” mortgage. There are costs and restrictions on insured mortgages. But they give you access to the best rates and terms.

So what kind of mortgage default insurance companies are out there? How does mortgage insurance work? And what are costs and restrictions for insured mortgages?

Let’s dive in…

What is mortgage default insurance?

Mortgage default insurance, also known as mortgage insurance or CMHC insurance, is required by the Canadian government for borrowers who have a down payment of less than 20% of the purchase price of their home.

Mortgage default insurance protects the lender if you stop making mortgage payments (default on your mortgage).

You pay a premium for mortgage insurance. Actually, technically the lender is charged the premium, then they pass the expense on to you. The premium is calculated as a percentage of your mortgage and usually it is wrapped into the mortgage.

So if you have a $100,000 mortgage and you’ve put down 5%, your premium is 4% or $4000. You can pay that premium up front, but most often it is wrapped into your mortgage. So your mortgage would be $104,000.

That’s right, you pay interest on the premium over the life of your mortgage. More on that later.

If you can put 20% or more down on the home, you don’t have to pay mortgage insurance.

Now, we have 3 mortgage default insurance companies in Canada: the Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. CMHC is by far the biggest. So who are they and what sets them apart?

Who is CMHC, Sagen and Canada Guaranty?

Honestly, they’re all very similar. Although Sagen and Canada Guaranty offer slightly different programs than CMHC.

CMHC is government-owned and they do a lot of research on Canada’s housing market.

Sagen (used to be Genworth Canada) is owned by a publicly traded American company and are the second largest mortgage insurer in Canada.

Canada Guaranty (CG) is a collaboration between the Ontario Teachers Pension Plan and National Mortgage Guaranty Holdings Inc. It’s not as big as Sagen, but completely Canadian owned.

So what are the differences between these three companies? There are little guideline differences between them that don’t matter to the borrower. However, the biggest difference is that Sagen and CG will cover borrowed down payments. CMHC will not.

Who gets paid by CMHC if I default on my mortgage?

The lender gets paid.

Do you still owe money then?

The lender has washed their hands of the situation, but CMHC will come calling.

When a lender makes a claim on an insured mortgage, CMHC pays the outstanding balance to the lender and takes over the mortgage. Then CMHC works with the borrower (you) to find a solution. They want you to keep your home. So they’ll offer repayment plans or loan modification.

However, if the borrower is not responsive or does not cooperate, CMHC may take legal action to recover the debt.

Honesty is the best policy. If you’re facing financial trouble, call your lender. They can work with you before CMHC ever needs to get involved.

Why do I need mortgage insurance?

You only need mortgage insurance if you want to put less than 20% down on a home in Canada.*

When a mortgage is insured, the lender feels better about taking a bit more risk. Offering a mortgage to someone who only put down 5% of the house value is a risk to the lender. If the mortgage is insured, there’s less risk.

Also, the standards for borrowers to qualify mortgage insurance are high.

• Your total debt has to be under 44% of your income.
• You need a credit score of 680 or higher.

If you qualify for mortgage insurance, you’re a AAA borrower. Lenders will compete for your business. So they offer better rates.

Do I have to pay mortgage insurance everytime I buy a new home?

Nope. Well, you don’t have to pay the full premium again.

As long as you qualify for mortgage insurance when you move, you can “port” your coverage to the new home (as long as the property meets mortgage insurance standards too).

You’ll have to pay a “top up” amount, but you won’t have to pay a full premium again.

How much does mortgage Insurance cost?

Your premium depends on how much you’re putting down on the home. Here’s a neat little table:

Down Payment	Premium
5% – 9.99%	4.00%
10% – 14.99%	3.10%
15% – 19.99%	2.80%
20% – 24.99%	2.40%
25% – 34.99%	1.70%
35% and up	0.60%

NOTE: If you’re paying 20% down or more, you do not have to pay for mortgage insurance. It’s optional. But, less than 20% down requires mortgage insurance.

When you need more than 5% down

Homes valued over $500,000 have slightly different rules. You can put 5% down on the first $500,000 of a home’s value. Then 10% down is required for the next $500,000.

So, if you’re buying a house for $600,000, your down payment is: 

5% of $500,000 = $25,000

10% of $100,000 = $10,000

Total Down Payment Required: $35,000

Important Note: Houses valued over $1 Million don’t qualify for mortgage insurance. You have to put at least 20% down if you buy a home over $1 Million.

Can I put 5% down on a rental property?

If you’re buying a duplex (2 apartments), and you move into one of the units, you can qualify for 5% down. If there are 3 or 4 units, it’s 10% down, minimum. 

Mortgage insurance will cover “owner occupied” rental properties, as long as you qualify. If you’re not moving into the property, you need 20% down.

What do I do with this information?

For the most part, your mortgage broker will understand if you need an insured mortgage or not. But it’s important that you understand how the premium affects your monthly payment.

And remember, you have to qualify for mortgage insurance. So if you want to pay less than 20% down on your new home:

• Keep your debt to income ratio below 44%
• Keep your credit score above 680
• Buy a home for less than $1 Million  

Ultimately, let’s talk about what you want to buy. We’ll get a detailed picture of your financial position and find out if you qualify now or not. If you don’t qualify yet, we can map out your steps to home ownership.