For many Canadian homeowners, a portion of their regular mortgage payment goes toward a CMHC (Canada Mortgage and Housing Corporation) fee. This fee is a mortgage default insurance premium intended to protect the lender from the risk of default. While CMHC insurance does protect the lender, it does not protect you, the borrower, in case of default. As such, you may want to consider how to avoid CMHC fees and reduce your total loan amount.
What Are CMHC Fees?
CMHC fees are an insurance premium charged by CMHC (Canada Mortgage and Housing Corporation) for mortgage default insurance. This CMHC Mortgage Loan Insurance is designed to protect lenders in case the borrower defaults on their payments.
Because low down payment mortgages are considered to have increased risks, CMHC fees are mandatory for borrowers who purchase a property with a down payment of less than 20% of the property’s value. The exact insurance premium is calculated as a percentage of the mortgage amount and can vary depending on factors like the amount of the down payment and the loan-to-value ratio of the mortgage.
The Benefit to the Lender
The main benefit and the sole purpose of CMHC Mortgage Default Insurance is to protect the lender if a borrower fails to make their payments. In this situation, the lender will simply make an insurance claim, and the insurance company will cover the missing payments minus the deductible.
How Much Does Mortgage Default Insurance Cost?
CMHC fees are calculated based on the loan-to-value percentage: the higher the percentage of the total house value you borrow, the higher the percentage you will pay in CMHC fees.
For instance, if your down payment is only 5%, and you will be borrowing 95% of your home’s total value, your CMHC insurance premium on the total loan will be as high as 4%. On the other hand, if you will be putting down 35% of your home’s value or more, the optional CMHC fees will be only 0.60% of the total amount borrowed.
Pros and Cons of Mortgage Default Insurance for Borrowers
Insured mortgages were created to protect the lender, yet it does offer a few benefits for borrowers as well.
Pros of Mortgage Default Insurance for Borrowers
- Lower down payment. If purchasing CMHC insurance, borrowers with down payments as low as 5% can get approved for a mortgage.
- Competitive interest rates. Because CMHC mortgage insurance protects lenders in case of default, they are often willing to offer lower interest rates in exchange for this protection.
- Flexible terms. CMHC-insured mortgages often come with more flexible terms and conditions, making homeownership more accessible to the general population.
Cons of Mortgage Default Insurance for Borrowers
- CMHC fees. Mortgage default insurance premium is typically added to the mortgage amount and subject to HST, which can considerably increase the overall cost of homeownership.
- Limited coverage. CMHC insurance is designed to protect the lender, not the borrower. As such, the borrower will still be held liable in the event of default.
- Approval criteria. Not everyone can get approved for mortgage default insurance. Typically, you would need to have a certain minimum credit score and a maximum debt-to-income ratio to qualify for CMHC insurance.
How to Avoid Mortgage Default Insurance
CMHC mortgage insurance is mandatory for any borrower who puts down less than 20% of the total property value. As such, to avoid CMHC fees, you would need to find a way to bring your available down payment funds to at least 20% of the home’s purchase price.
Use Your Existing Savings
If you can save at least 20% of the home’s purchase price, you will be able to avoid CMHC fees. Alternatively, you can consider purchasing a lower-priced home and use your existing savings to put down 20% of its value.
Borrow Money From a Close Family Member or Friend
If your own savings aren’t enough to avoid CMHC fees, you can always borrow money from a close family member or friend. However, before you can use the borrowed funds as a down payment, you would need to provide the lender with a gift letter that outlines the amount and purpose of the money and proof that this is recognized by all parties involved.
Get Secondary Financing
Secondary financing may allow you to obtain the necessary down payment to avoid CMHC fees. However, it may also jeopardize your mortgage approval criteria, such as minimum credit score and maximum debt ratios. As such, ensure that you carefully consider your financial situation before taking out a line of credit or applying for a personal loan for down payment purposes.
Go Through A Private Lender
Unlike traditional banks and credit unions, some private lenders won’t charge CMHC fees even with lower down payments. Keep in mind, however, that private lenders typically charge considerably higher interest rates and fees than traditional funding sources. This means that any savings on mortgage default insurance premiums will likely be offset by other expenses associated with taking out a private mortgage.
Reach Out to A Mortgage Broker
If you find yourself questioning how to avoid CMHC fees, know that you have more than one option to consider. In this situation, a skilled and experienced mortgage broker like Jason Anbara can help evaluate your finances and find just the right solution for you. Let’s talk—give us a call today.
