If you are considering buying a home in Canada, you need to become familiar with CMHC. This is a type of default insurance that is mandatory if the down payment on the home is between 5% and 19.99%. This insurance isn’t available on any home that is purchased for more than $1 million. That means that the buyer would have to put at least 20% or more down on the home at the time of purchase. There is a 25 year maximum amortization timeframe for any CMHC mortgage.
Why is it Necessary?
Any time a lender offers money for a home to be purchased, they take a risk. With CMHC insurance in place, that risk is lowered. It means that if the buyer of the home should default in the mortgage payments, the lender can still get their money.
What does it Cost?
With this type of insurance in place, the actual risk of default is spread across numerous buyers. This helps to keep the cost lower. The average cost of CMHC insurance is between 1.75% and 2.75% of the amount owed on the loan.
Some people aren’t happy at all when they discover they have to pay default insurance (CMHC) if they have a down payment on a home that is less than 20%. However, the reality of it is that if this insurance wasn’t in place, lenders would have to pull in the reigns. They would have to deny more of the loans or require a higher down payment. They would also have to increase the rate of interest to be able to accommodate the amount of risk they were incurring.
There are free calculator tools found online that allow you to determine how much this default insurance is going to cost. All you have to do is enter the price of the home and then select the percentage of down payment you have to put down on that home. Next, you will select the amortization timeframe. This will calculate the amount of CMHC insurance that you will pay and add that to your loan amount.
For example, a home that cost $121,000 – 10% down payment = $2178 CMHC insurance. With a 25 year amortization, this means that the remaining price due to be financed is $118,000.
The higher the down payment is on the home, the less that insurance is going to cost. To help avoid the cost at all, do your very best to come up with at least 20% down on the home when you get the mortgage. Then you won’t have to pay the coverage at all, and that is more money you can use for other needs.