What is CMHC Mortgage Insurance ?
“Mortgage insurance” is quite often used interchangeably when addressing mortgage default insurance and mortgage liability insurance. The word CMHC is used to specify mortgage default insurance.
How is Different Than Mortgage Liability Insurance?
CMHC INSURANCE is paid by the borrower buying their home with less than 20% down payment. The insurance protects lenders money in case the borrower defaults.
The mortgage insurance premium is paid by the borrower to one of the three Canadian insurers when buying a home with down payment between 5% and 19.99%. This is also known as CMHC Mortgage insurance, where CMHC is one of the default insurance provider in Canada.
LIABILITY INSURANCE is paid by the borrower to secure the monthly payments in case of loss of job, sickness or death. While all mortgage lenders and other Insurance companies provide this insurance, borrowers are encouraged to know and understand all their options, pros and cons of each prior to deciding on whom to go with.
Mortgage liability insurance is paid by the borrowers but the benefits are meant to be enjoyed by their beneficiaries in case the policy holder dies.
To keep perspective this blog only talk about mortgage default insurance, frequently also known as CMHC Mortgage insurance
What does CMHC Mortgage Insurance covers?
It protects the mortgage lenders money in case borrowers defaults on the monthly payment or is unable to pay it back.
What Are The Benefits of CMHC Mortgage Insurance?
Default mortgage insurance (CMHC mortgage insurance) has no direct benefit to the borrowers except it allows home buyers own their primary residence with as low as 5% down payment.
Is mortgage insurance necessary in Canadian mortgages?
No, mortgage default insurance is not necessary in Canadian mortgages as long as borrower has 20% down payment (aka conventional mortgages) towards his/her home purchase. If the borrower has less than 20 down payment (high ratio mortgages), they have to pay CMHC mortgage insurance.
How Much Do You Mortgage Insurance?
In a nut shell mortgage default insurance is paid by the borrowers with less than 20% down payment to insure lenders money in case borrower defaults on the payments.
Default mortgage insurance premium is calculated as percentage depending upon the amount of down payment. Borrower is charged a premium (%) between 2 – 4% plus PST.
The insurance premium is added on top of the mortgage amount. The PST portion is not added onto the principal amount.
Click here to know more on CMHC insurance rates or download a free premium smart phone app by clicking the icons below.
Yes indeed there is a tax on these premiums. In Ontario borrowers has to pay PST (Provincial Sale Tax) on these premiums.
These Taxes cannot be added on to the mortgage principal amount. They are to be paid in cash as they are due upon closing.
Only the insurance premium can be added on the mortgage principal amount.
How to avoid mortgage insurance premium?
To avoid mortgage insurance premium you should buy a property with at least 20% down payment.
How does mortgage insurance affects the amortization period?
All insured mortgages i.e. home purchases with less than 20 down payment have maximum amortization period of 25 years only.
As per the recent changes following are the minimum down payment requirements for insured mortgages;
1. Minimum down payment of 5% is acceptable for the purchase price of up to $500,000. Down payment of 10% is required for the rest of the price up to $999,999.00.
2. Purchase prices above or equal to $1,000,000 requires minimum down payment of 20%. Mortgage default is not required for these purchases
3. All insured mortgages can be amortized maximum for up to 25 years only.
How many mortgage insurance providers are in Canada?
There are 3 mortgage default insurance providers serving Canadians namely CMHC (Canada Mortgage & Housing Corporation), Genworth and Canada Guaranty.
CMHC stands for Canada Mortgage & Housing Corporation. This is a crown corporation of government of Canada.
Since MAY 30, 2014, CMHC discontinued mortgages for self-employed whose incomes cannot be validated via 3rd party.
Genworth is the largest private residential mortgage insurer who insures lenders who help Canadians buy their home with less than 20 percent down payment since 1995.
Canada Guaranty, the only 100% Canadian private insurance known as Canada Guaranty since 2010. This Canadian private investor group comprise of Ontario Teacher’s Pension plan and National mortgage guaranty holdings Inc.
Since the mortgage insurance premiums are very similar for all 3 of the mortgage insurance providers, it doesn’t really matter much for a borrower.
The only two mortgage default insurance providers who were insuring self- employed borrowers with and without qualified incomes were Genworth and Canada Guaranty.
As of May30, 2014, CMHC discontinued insuring mortgages for self-employed borrowers, who were unable to prove income through 3rd party validation.
As of Oct 01, 2018, CMHC has introduced changes which should help self-employed Canadians become home owners.
What are the new CMHC mortgage insurance and lending guidelines for Self Employed?
CMHC has proposed new guidelines (Oct 31, 2018) providing more guidance and flexibility to lenders when evaluating borrowers for high ratio mortgages with less than 24 months of self employment history.
- Self-employed borrowers with less than 2 years in the business
- People acquiring running business while being in the same line of business
- Business owners with sufficient cash reserves to support future expansions and day to day expenses
- Previous education and training
- Allow NOA (Notice of Assessments), T1 Generals, T2125 (Statement of Business and Professional Activities) to support add backs for grossing up income for sole proprietors and partners. Use audited financial statements, POI (Proof of Income Statement) as an alternative to NOA & T1 General, recent business account statements, contracts and business documents.
- These changes applies to both, transactional and portfolio insurances.
An new immigrant, IT Proffesionaly, employed for 2 years, opens his/her own business as a consultant for about 1 year, looking to buy his own home
A licensed electrician who worked for 5 years as an employee, becomes self-employed year ago looking to buy his own home with less than 20% down payment.
As you can see these new CMHC enhancements are designed to help a small group of self-employed. Caution is required if you are in market looking for a mortgage as self employed.
Caution
Simply by walking into a branch and hoping for a mortgage approval as a self-employed is not recommended. Despite the hype always remember, Mortgage stress test requirements applies and the final approval is always at the discretion of the lenders.
Self Employed Mortgage Expert
If you are self-employed looking for a mortgage, you are encouraged to speak to a mortgage expert who understand and specializes in self-employed mortgages.
References:
www.cmhc-schl.gc.ca/ www.genworth.ca/en/index.aspx
www.canadaguaranty.ca/