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What Is “Mortgage Insurance” and How Does It Benefit YOU?

Without it, most First Time Buyers would still be renting. Here’s why….

When people hear about mortgage default insurance (often referred to as CMHC fees) they have a negative reaction. People often assume that it is the type of insurance that can be declined, such as life or disability insurance. And of course, most people are against having additional fees added to the cost of purchasing a new home. But, mortgage default insurance is actually a good thing. It allows people to purchase a home with less than 20% of the purchase price as a down payment. Since most people put less than 20% down on their first home purchase, many of us wouldn’t be able to buy a home without mortgage default insurance. 

Although mortgage default insurance is commonly referred to as “CMHC fees”, there are 3 providers of mortgage insurance in Canada: CMHC (www.cmhc.ca), Genworth (www.genworth.ca) and Canada Guarantee (www.canadaguarantee.ca). But, you don’t have to decide between these providers, all of these companies offer the same service and the same rates.

Mortgage default insurance is a ONE-TIME COST that is added to your mortgage. The amount of insurance you pay depends on how much you put as a down payment. The more money you put down, the less risky it is for the bank to loan you the amount of your mortgage, so the less you pay in mortgage insurance. The chart below shows how the cost of the insurance is calculated (if you’re having trouble understanding, call us anytime and we can help!):

Loan to Value

Standard Insurance Premium

Up to and including 80%

With 20% down there is typically no insurance premium however if it is a rule, remote or unique property the bank may require the mortgage to be insured

Up to and including 85%

1.80%

Up to and including 90%

2.40%

Up to and including 95%

3.60%

 

For example, if you put 5% down on a $300,000 home, your CMHC fees would be as follows:

Purchase price: $300,000 –$15,000 (5% down payment) = Mortgage requirement of $285,000

$285,000 mortgage X 3.6% Mortgage default premium = $10,260 plus 8% PST ($820.80) = $11,080.80.

You are charged PST on your mortgage default insurance, but the good news is that only the PST portion has to be paid out-of-pocket by you on the closing date. The remainder, in this example the $11,080.80 is added to your mortgage.

In short, mortgage default insurance is an additional cost you need to consider when purchasing a home with less than 20% down, but the benefit is that it allows you to purchase a home for as little as 5% down 

 

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Here to help inform, educate and represent you in the home financing process.

View all posts by James Loewen

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