CMHC Mortgage Loan Insurance Explained
by Marc Salerno
For many Canadians, the hardest part of buying a home—especially a first home—can be saving for the down payment.
If you can only offer less than 25% of the purchase price as a down payment, you will normally be required to buy mortgage loan insurance.
Pioneered by Canada Mortgage and Housing Corporation (CMHC), mortgage loan insurance protects lenders against payment default, allowing Canadians to access high-ratio mortgages at the lowest possible rates.
CMHC mortgage loan insurance enables you to finance up to 95% of the purchase price of your home. This means you can buy a home with as little as 5% down. For example, if you wanted to purchase a $250,000 home and you qualified for mortgage insurance, you would need a down payment of just $12,500.
Mortgage loan insurance is available through your lender, who contacts CMHC on your behalf. You need to pay a premium for mortgage loan insurance, which is calculated as a percentage based on the down payment as compared to the purchase price of the home.
A traditional down payment of 15%, for instance, would incur a mortgage loan insurance premium of 1.75% of the total value of the loan, while a down payment of 5% would incur a mortgage loan insurance premium of 2.75%. Your lender’s or mortgage broker’s representative will calculate your premium, which you can pay either in a lump sum or as part of your mortgage payments.
Both new and resale homes are eligible for mortgage loan insurance, as long as the home is in Canada and it’s your principal residence. In addition, your total housing costs (including mortgage payments, property taxes, heating, annual site lease, and 50% of condominium fees if applicable) should not be more than 32% of your gross household income, and your total debt load (including your housing costs and other debts such as personal loans, car loans, and credit cards) should not exceed 40% of your gross household income. Other criteria may also apply and are subject to change, so contact your lender for more details.
CMHC also offers mortgage insurance that helps homebuyers obtain a secured homeowner line of credit of up to 90% of the value of their principal residence, either at the time of purchase or if you want to refinance. The line of credit lets you draw funds up to your insured credit limit as often as you wish without the need to reapply and allows you the flexibility to pay as little as the monthly interest charges for a limited period of time. Full repayment is required within 25 years from the date the loan is insured.
CMHC also offers a product called Flex Down, which makes finding a down payment even easier. Traditional mortgage loan insurance requires borrowers to fund a minimum of 5% down from their own resources when buying a home. With Flex Down, homebuyers with a proven track record in managing debt can provide the 5% down payment from a variety of new sources, including borrowed funds or lender incentives, provided the funds are at arm’s length from (and not tied to) the purchase or sale of the property. Currently, the mortgage loan insurance premium for Flex Down is 2.90%. Contact your lender to confirm availability of this product and for the qualifying criteria.
For more information about mortgage loan insurance or to order your free copy of CMHC’s Homebuying Step By Step consumer guide and workbook, please visit our website at www.cmhc.ca or call toll free at 1-800-668-2642.
Mark Salerno is district manager for the GTA at the Canada Mortgage and Housing Corporation. For over 60 years, CMHC has been Canada’s national housing agency and a source of objective, reliable housing expertise.
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