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How to Minimize CMHC Insurance

This piece was originally published on November 25, 2019, and was updated on October 25, 2022. 

Buying a home in Canada can feel impossible. If you’re already paying rent, you at least have an idea of what it’s like managing high monthly costs. Those monthly costs usually aren’t the issue when preparing to buy a home. The barrier to homeownership in Canada is trying to save for that down payment. 

If you want to avoid having to pay for CMHC insurance, you’re looking at a minimum 20% down payment. And with average home prices across the country being over $640,000 as of September 2022, you’ll need to scrounge up at least $100,000 if you hope to meet the percentage – and that doesn’t include closing costs. Enter CMHC. 

What is CMHC insurance aka mortgage default insurance? 

There is one way around the obligated 20% down payment. It’s called mortgage default insurance, or by its common acronym, CMHC insurance. CMHC refers to the Canadian Mortgage and Housing Corporation, which is the largest issuer of mortgage default insurance. It's important to note that there are also private companies that provide mortgage default insurance, such as Canada Guaranty. If you’re still hoping to purchase a home in Canada but see that 20% as an obstacle, then mortgage default insurance is an option. It’s required insurance for homebuyers who make a down payment of less than 20% on a property valued at less than $1 million (properties valued at $1 million or more are not eligible for mortgage default insurance, meaning a 20% minimum down payment is required). It protects the lender in the event that you’re not able to pay your mortgage. 

How much will CMHC insurance cost you? 

CMHC insurance will cost in the neighbourhood of 1.75% – 3.15% of your mortgage value. On a $500,000 home, that’s about $94,000 on a 25 year mortgage (assuming a 2.79% interest rate on the 1.75% CMHC), or an extra $435/month. That’s a pretty good chunk to add on to your existing mortgage. 

But look at it this way: mortgage default insurance is actually a favourable aspect for a buyers market. It keeps interest rates down and allows lenders to offer lower mortgage rates in Canada, with the addition of CMHC protection. Compared to current mortgage rates in other countries without similar infrastructure, this is a benefit. 

Two ways to decrease mortgage default insurance

  1. Increase your down payment. You can use our down payment calculator to see how larger and smaller down payments will affect the amount of mortgage default insurance you will require. 
  2. Decrease your amortization period. Our amortization calculator allows you to generate different amortization schedules showing what your monthly payments would be over time using different amortization length scenarios. 

CMHC Mortgage Loan Insurance Costs

 

Let’s consider a $500,000 mortgage with a 25-year amortization period.

Increasing your down payment from 5% – 10% could save you about $31,000 or $139/month. 

Looking at the table above you can see that the CMHC percentage for the down payment range 5% – 9.99% stays constant at 2.75%, for a 25 year amortization period. But if you increase your down payment to 10%-14.99%, your CMHC percentage moves down to 2%.

While it’s not always possible to increase your down payment in the short term, you should always consider how close you are to the next CMHC range.

It’s critical to know that the maximum duration of a mortgage for any down payment less than 20% is 25 years. There is no 40-year amortization - the Conservatives dumped it in 2008. Play with the numbers to see where you best fit – for instance, can you do a 35-year amortization and avoid the need for mortgage default insurance, or, better yet, a 25-year amortization period with less of a down payment and utilizing CMHC insurance? 

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How to completely avoid CMHC fees 

The only real way to completely avoid having to pay for mortgage default insurance is to come up with the full 20% down payment. If you’re a bit short, there are ways you can try to put some money together: 

  • Use your RRSPs (remembering that there might be a tax penalty for early withdrawal). 
  • If you put a bunch towards your RRSP, use your income tax refund. 
  • Use a private mortgage lender. They don’t charge CMHC fees but their interest rates and other bank fees will be higher. 

Is avoiding CMHC fees worth the effort?   

Your goal when you first started saving for a home was to buy one. Whether or not you had a specific timeline in mind, paying the extra CMHC fees allows you to get to your goal that much faster, even though it’s at a cost. That’s not necessarily a bad thing if you take the time to weigh the options. 

Keep this in mind: 20% on a $500,000 home is $100,000. 10% is half of that and should theoretically take you half the time to save. If the tradeoff is paying a CMHC fee of 1.75%, which translates into $296/month (based on 10% down and a 2.79% interest rate), is waiting the extra time to save double the money worth it? 

Let’s say it took you an extra two years to save up the additional $50,000 to get to 20%. You’ll need to start accounting for the shift in the market in the two years you spent saving. Will the numbers still be in your favour?  

None of this makes any sense if you don’t have a plan. You need to work with lenders to know how much home you can afford, connect with a mortgage professional to calculate your mortgage payments and be honest with yourself about mortgage affordability. Like we said, the average cost of a home in Canada today is well over $600,000. If you’re hoping to live in popular urban areas like Toronto or Vancouver, that amount goes to over $1 million. Where you want to live and where you can afford to live is the question you need to be honest about. 

To learn more about calculating your mortgages, check out our mortgage payment calculator.

 

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