What is CMHC?
Canada Mortgage and Housing Corporation or CMHC is a mortgage insurance company that increases the affordability of housing to Canadian families. Financial institutes can lend up to 80% of the value of the house. The homeowner must come up with the other 20%. It is not everyone who has $60,000, for example, to put as a down-payment on a $300,000 home. This is where CMHC comes in. They will lend up to an additional 15% of the value of the house, or $45,000 on a $300,000 house. This way the homeowners only need to put down as little 5% or $15,000.
How it works?
If we all remember the market crash of 2008, where governments bailed out banks in the USA. In neighbouring Canada, our banks didn’t fair much better. As a result, government agencies tightened lending regulations, making it far more difficult to have a loan approved. This is because it is now far more difficult to have CMHC insurance on your loan. So what exactly is meant by “insurance”?
Let’s use the example above where the homeowners want to buy a $300,000 house, but can only put $15,000 as a down-payment. The banks are not willing to take on the risk of lending $285,000 on a $300,000 house. Any drop in the market and the bank loses a lot of money. As such the banks apply for CMHC insurance to cover the additional $45,000. In doing so, CMHC is doing two things: (1) it is lowering the risk of the banks, and (2) it provides insurance to the bank that if the house value drops below the amount lent by the bank, CMHC will cover the difference.
Costs associated with CMHC
Now this sounds all too good to be true. What’s the catch? CMHC is not a charity. There are heavy costs the banks must incur for using there services. And yes you guest it, the bank will pass on that cost to you, the homeowner. So back the the example above. What is the cost of using CMHC when having only a 5% ($15,000) down-payment on a $300,000 home? 3.60% of the total loan ($285,000) or $10,260. But here is the good news – you don’t have to pay that immediately and can tack that on to your mortgage. End result, you bought a house for $300,000, put $15,000 down, and have a mortgage for $295,260.
The table below shows the typical costs for obtaining CMHC insurance on a personal residential property if we are to increase the down-payment. The cost drastically reduces with larger down-payment. CMHC insurance is not required for down-payments of 20% or greater.
|Down Payment||Rate of the total loan|
|5% up to less than 10%||3.60%|
|10% up to less than 15%||2.40%|
|15% up to less than 20%||1.80%|
|20% or more||0.00%|
Note that if you live in Ontario, Manitoba, or Quebec, the cost of the insurance is also subject to provincial sales tax that must be paid upfront and cannot be added onto the mortgage value.
CMHC definitely increases the affordability of residential properties to homeowners. However, this comes at a hefty price. Consider all your options and costs before identifying what option is best for you.