The current law in Canada requires that any residential mortgage where the borrower has less than 20% down payment be insured against borrower default. The main insurer to the banks is CMHC (Canadian Mortgage & Housing Corporation) followed by Genworth, and Canada Guaranty. The insurance premiums are all the same among the three and depend on a few variables. In any regard, they can be a significant amount of money, in the tens of thousands of dollars added to the loan balance. The question often asked is how to avoid CMHC fees / can I avoid CMHC fees? Conversely, I hear prospective buyers say they are waiting to purchase until they have saved 20% in order to avoid CMHC fees. This article looks at the costs and benefits of CMHC ‘mortgage default insurance’ and whether or not it is a big deal.
Costs to the Borrower
Insurance premiums can be found here and are expressed as a percentage, which is then multiplied by the amount borrowed. The premium is added to the loan balance and amortized over the life of your mortgage. A CMHC insurance premium might add $21 per month in extra payments per $100,000 borrowed (using a 4% interest rate amortized over 25 years with 5% down payment, as the example).
Benefit for the Lender
The benefit to the mortgage lender and the sole purpose of mortgage default insurance in the first place is that if the borrower fails to make their mortgage payments the bank simply makes an insurance claim and the insurance company pays the bank (less the deductible) and the bank is kept largely whole - just like vehicle insurance. As with all insurance companies, CMHC can then come after the borrower who can be sued for default. Because CMHC insurance reduces the bank’s lending risk, banks are prepared to and will offer you a lower interest rate for an insured loan, in the order of 0.3% cheaper than a non-insured loan. This is an enduring benefit in subsequent renewals also and very important point to understand. This leads to the next point, benefits for the borrower.
Benefits for the Borrower
CMHC insurance provides a number of benefits to borrowers, some obvious and some less obvious
- First of all, with lower down payment requirements, the borrower can often purchase a home years earlier then if they had to save up 20% down. If you are currently renting a home, that means you will begin to pay down your own mortgage much sooner instead of your landlord’s and quit flushing your money away! If the part of your mortgage payment that goes towards your mortgage balance is - say $750/mo - then you will likely recoup your CMHC fees in the first year! So in that regard, paying CMHC fees is a no-brainer.
- Even at 20% or more down payment, there is a case for a CMHC-insured loan over a non-insured loan. An insured loan will likely be offered at a lower rate than a conventional (non-insured) mortgage, typically 0.3% lower at the time of writing this article (2018) because the loan is less risky to the lender as mentioned above. The question is then, how long would it take to recoup the CMHC premiums with the lower interest rate at 20% down? And the short answer is about 7 or 8 years. If you are planning on keeping the home with no plans to sell or refinance, then a CMHC-insured loan will have a lower lifetime interest expense than a non-insured mortgage. Even if you do end up selling or moving, likely not a significant cost in the grand scheme of things.
- Besides potentially saving money, is there a scenario where you would consider a CMHC-insured loan with 20% or more down? The answer is yes, because there will be more lender choice. Without CMHC-insured loans many lenders are simply not interested in providing mortgages for rural and small-town properties or acreages. Fewer lenders willing to consider your property simply means less choice and fewer options for you and your personal financial situation. If your goal is to purchase a certain property and CMHC insurance is the only way to make it happen, then don’t sweat it, you’ll likely get the mortgage with a lower rate as consolation!
Strategies to Avoid CMHC Mortgage Default Insurance
Okay, I get it - you still want to avoid CMHC fees so you will need to assemble 20% down payment. If you are short,
- Consider asking an immediate family member for a “gift” for the short-fall amount.
- Sell something of value.
- Use your RRSP or other savings
- Get a personal loan, typically cannot exceed 10% of the purchase price. Payment must be factored into your lending ratios.
- RRSP loan secured by RRSP purchase, then cash in RRSP and keep loan.
- Wait for an income tax refund or year-end work bonus if applicable.
- Some lenders will permit the house seller to provide secondary financing, typically no more than 10% of the purchase price.
- Vendor-supplied mortgage financing. The seller acts as your bank. Refinance in a couple of years once your equity position is 20% or more.
- Private mortgage lenders don't have to charge CMHC at lower down payments (but their rates and fees will be higher than bank rates).
- Finally, understand that CMHC fee premiums as percentages are in brackets and at their highest at 5% down, less when 10% or more down, and even cheaper at 15% or more down, so if you can at least stretch to the next bracket you’ll save money (and get a lower interest rate).
Keep your Eye on the Puck
Sometimes we get focused on certain things (like avoiding CMHC) and have to remind ourselves of the real goal, which might be to get the place that you want to call home. CMHC insurance is a tool to get you where you want to get - to help you get approved for a mortgage or a property you might not otherwise get without it. If you would like to discuss your particular situation or circumstances, please feel free to contact us. Keep in mind, a good mortgage broker has access to multiple lenders, multiple lending programs, and is solution-focused. It all starts with a good plan.