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CMHC mortgage loan insurance

Last modified: 2021/11/05 | Approximate reading time 4 mins

If you've ever had to take out a mortgage to purchase a home, you've likely heard of mortgage loan insurance. Most buyers today need to purchase this insurance in order to take out a mortgage with a minimum down payment.

But what exactly is this insurance used for? Is it similar to home insurance? Is it mandatory? How much does this type of insurance cost? This article will help answer any questions you may have about CMHC mortgage loan insurance.

Mortgage broker and clients

The purpose of having mortgage loan insurance

To begin with, it's important to distinguish between mortgage loan insurance, home insurance, and mortgage life insurance. Each one serves an entirely different purpose.

Home insurance, for instance, protects you in the event of material damage to your property. Mortgage life insurance, which covers your mortgage balance, instead protects your loved ones in the event of death or disability. Mortgage loan insurance, on the other hand, protects your lending financial institution from loss if you can't make your payments.

In doing so, CMHC's insurance program makes homeownership easier by allowing borrowers to purchase a home with a minimum down payment of 5% from various sources, such as savings, homeownership, sale of property or donation from a close relative. 

Without this mortgage insurance, financial institutions would not allow borrowers to buy a property with such a low down payment.

How a down payment impacts your insurance

If you want to buy a house using a minimum down payment of 5%, you must take out mortgage loan insurance. This is the only way you will be able to acquire the loan needed to purchase your home.

You also need this insurance when the amount of your loan rises above 80% of the purchase price of the property. This means you'll need to provide a minimum down payment of 20% if you wish to avoid having to take out this insurance.

In certain situations, such as being self-employed, financial institutions may require you to take out mortgage loan insurance even if you provide a down payment that is higher than 20%.

Mortgage contract with loan insurance

Eligibility criteria for CMHC mortgage loan insurance

On July 1, 2020, CMHC tightened the eligibility criteria for its mortgage loan insurance to protect buyers and reduce risk for taxpayers.

Along with other measures, the federal agency changed the minimum credit score required. While the minimum score was 600 at the start of the year, borrowers must now have a credit score of at least 680 to be eligible for CMHC insurance.

The sources used for down payments were also reviewed. For example, non-traditional sources that raise the borrower's debt levels are no longer accepted for mortgage loan insurance.

In addition, the debt repayment ratios (GDS and TDS) must represent a maximum ratio of 35% and 42% respectively. Although most financial institutions require a maximum GDS ratio of 32% and TDS ratio of 40%, you may find that some lenders ask for lower ratios.

The price of a mortgage loan insurance

Mortgage loan insurance premiums

To obtain mortgage loan insurance, you will need to pay a premium. These payable fees may be added to the insured loan amount. Be advised, however, that you will be required to pay interest on these fees if you add the premium to your loan amount.

It's also important to know that some provinces levy a provincial sales tax on mortgage insurance premiums. This is the case for Ontario, Quebec and Saskatchewan. This provincial tax cannot be added to the total loan amount and buyers must see a notary to pay it.

The premium for CMHC mortgage insurance varies between 0.60% and 4% of your mortgage amount. It's calculated based on your down payment. The higher the loan-to-value (LTV) ratio is on your house, the higher your insurance premium will be.

For example, if you offered a 5% down payment, which equals a 95% LTV ratio, your mortgage loan insurance premium will be 4%. You can see some other possibilities that may apply in the table below:

The LTV ratio of the house

Premium applied to the loan amount

65% or less

0.60%

75% or less

1.70%

80% or less

2.40%

85% or less

2.80%

90% or less

3.10%

95% or less

4.00%

Portability and premium discounts

With CMHC's portability feature, buyers can receive a premium discount to reduce the premium payable when they make a new loan insurance application. This discount is calculated according to the length of time between the original closing date of the loan and the new mortgage insurance application.

For example, if the period between the closing date and the new application is 6 months, the applicant can be entitled to a 100% discount on the premium already paid for the initial CMHC-insured loan. If the period is 12 months, there could be a 50% discount on the premium. And with 24 months, the discount would go down to 25%, for example.

For more information on CMHC premiums and discounts, click here.

Do you need help understanding everything that's involved in getting a mortgage? A mortgage broker can help. This professional gives invaluable advice free of charge.

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