If you’ve ever taken out a mortgage to buy a home, you’ve probably come across the Canada Mortgage and Housing Corporation (CMCH) mortgage loan insurance. Today, most buyers need to get this insurance, or one from Sagen, when making a real estate purchase with a small down payment.
But what exactly is this insurance for? Is it required? How much does it cost? This article will answer all your questions.
Mortgage loan insurance: what is it for?
First, it’s important to distinguish between mortgage loan insurance and mortgage life insurance, as they serve very different purposes.
Mortgage life insurance is a policy that covers your mortgage balance in the event of your debt or disability, protecting your loved ones from the financial burden. In contrast, mortgage loan insurance protects the lender in case you’re unable to make your mortgage payments.
The CMHC program, for example, helps make homeownership more accessible by allowing borrowers to purchase a home with as little as a 5% down payment. This down payment can come across from various sources, such as personal savings, proceeds from selling a property, or even a gift from a close family member.
Without this type of insurance, lenders would typically require a much larger down payment before approving a mortgage.
When is mortgage loan insurance mandatory?
Mortgage loan insurance is required if you’re buying a home with a down payment of less than 20%. Specifically, if your loan amount exceeds 80% of the property’s purchase price, you’ll need to secure mortgage insurance in order to obtain the loan.
However, in some cases, such as for self-employed individuals, lenders may require mortgage insurance even if your down payment is greater than 20%.
Eligibility criteria
On July 1, 2020, CMHC introduced stricter eligibility requirements for its mortgage loan insurance to better protect buyers and reduce risk for taxpayers.
Among the changes, the minimum credit score required to qualify for CMHC insurance was raised from 600 to 680. Additionally, the sources of down payment were reviewed and non-traditional sources that increase a borrower’s debt levels are no longer accepted for insurance.
Moreover, debt service ratios (GDS and TDS) now have a maximum limit of 35% and 42%, respectively. While most lenders typically set a maximum GDS ratio of 32% and a TDS ratio of 40%, some financial institutions may impose even stricter limits.
How to calculate the CMHC mortgage insurance premium?
When participating in the CMHC mortgage loan insurance program, you’ll need to pay a premium. This premium can be added to the mortgage amount, but keep in mind that doing so means you’ll also pay interest on these fees over the life of the loan.
In addition, certain provinces, such as Ontario, Quebec and Saskatchewan, charge provincial sales tax on mortgage insurance premiums. This tax cannot be added to the loan amount and must be paid separately by the buyer at the notary’s office.
The CMHC mortgage insurance premium ranges from 0,6% to 4% of the mortgage amount, depending on your down payment. The higher the loan-to-value (LTV) ratio, the higher the premium will be.
Below is a table showing possible scenarios based on different down payments and LTV ratios:
| Loan-to-Value ratio | Premium on total loan amount | Premium on increase to loan amount for portability |
| 65% or less | 0.60% | 0.60% |
| 75% or less | 1.70% | 5.90% |
| 80% or less | 2.40% | 6.05% |
| 85% or less | 2.80% | 6.20% |
| 90% or less | 3.10% | 6.25% |
| 95% or less | 4.00% | 6.30% |
Source: CMHC
How to avoid paying the CMHC premium?
If you’re not keen on paying for mortgage life insurance, there is a way to avoid the premium. To bypass this cost, you’ll need to make a down payment of at least 20% when purchasing your home.
However, depending on the type of property you’re buying and your financial situation, some lenders may still require a higher down payment or additional criteria to qualify. It’s always a good idea to check with your lender to understand what applies to your specific case.
CMHC portability feature: premium discounts
CMCH offers a portability feature that allows buyers to receive a discount on their mortgage insurance premium when they apply for a new loan insurance. This discount is based on the length of time between the original mortgage closing date and the new insurance application.
For example:
- If the time between the original closing date and the new application if 6 months, the applicant may qualify for a 100% discount of the premium paid the initial CMHC-insured loan.
- If the period is 12 months, the discount could be 50%.
- After 24 months, the discount could be 25%.
This feature can help reduce the overall cost of mortgage insurance when purchasing a new property.
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