What is CMHC Insurance and why do lenders require it?
Typically, when you get your mortgage through a standard channel (major bank or mortgage broker), the bank pays an insurance premium to CMHC in order to protect themselves in the event of a default. This premium is then passed onto you, the consumer. Because the premium is higher with the less money down, it allows those putting the minimum downpayment of 5% to enjoy the same interest rates as people putting 20% or more down on their home. This premium can be paid upfront, or added onto your mortgage and blended in with your monthly payments.
To the average consumer, it may seem like a waste of money and an unnecessary expense with no clear benefit, but it couldn’t be further from the truth. The CMHC premium significantly reduces the lenders risk, which allows them to continue lending in times of economic downturn and recession. It’s imperative to the Canadian economy that the housing market remains strong. Continued, strong regulatory oversight by the government ensures that we don’t have a severe economic crisis like the United States had in 2008, which was caused by a lack of regulation and oversight by the U.S. Federal Government.
The amount of the premium can be significant. For example, with a purchase price of $200,000, a minimum downpayment of 5% or $10,000, the premium is $5,985. Here is the CMHC premium calculator so you can estimate the premium on your future purchase.
For more details on how the CMHC premium will affect you, visit https://www.cmhc-schl.gc.ca/en/co/buho/