Mortgage default insurance, commonly referred to as CMHC insurance, is mandatory to purchase a home in Canada with a down payment of less than 20%. It protects the lender in the event that a homeowner is unable to pay their mortgage. Upon hearing of this unforeseen cost, many home buyers shirk at the additional incurrence (in the neighbourhood of 1.75% – 3.15% of your mortgage value). However, CMHC is actually a favourable aspect to the home buyer market and without it, interest rates would increase at low down payment percentages. Instead, lenders in Canada can offer lower mortgage rates with the addition of CMHC protection, compared to rates in other countries without similar infrastructure.
TWO WAYS TO DECREASE CMHC INSURANCE
1. Increase your down payment (move from left to right in the table)
2. Decrease your amortization period (move from top to bottom in the table)
|5% – 9.99%||10% – 14.99%||15% – 19.99%||20% and higher|
|Amortization||31 – 35 years||3.15%||2.40%||2.15%||0%|
|26 – 30 years||2.95%||2.20%||1.95%||0%|
|25 years and lower||2.75%||2.00%||1.75%||0%|
For the following analysis, let us consider a $300,000 mortgage with a 25-year amortization period.
Increasing your down payment from 9% – 10% could save you $2,250
Looking at the table above you can see that the CMHC percentage for the down payment range 5% – 9.99% stays constant at 2.75%, for a 25 year amortization period. However, if you increase your down payment to 10%-14.99%, your CMHC percentage moves down to 2%.
Moving from 5%-9.99% to 10%-14.99%:
0.75% * $300,000 = $2,250
This would require moving your down payment from $15-30K to $30-45K. It may not be financially feasible to do so, but homeowners should always consider how close they are to the next CMHC range.
Moving from 10%-14.99% to 15%-9.99%:
0.25% * $300,000 = $750
Decreasing your amortization period from 35 to 25 years will save you $1,200 in CMHC insurance
CMHC premiums are added for longer amortization periods: 0.20% for 26-30 years and 0.40% for 31-35 years. Let`s translate these into dollars amounts on a $300,000 mortgage, starting with a 25 year amortization:
26 – 30 years: $600 extra
31 – 25 years: $1,200 extra
Decreasing your amortization period from 35 years to 25 will increase your monthly payment from $1,136 to $1,372 (based on a 10% downpayment and a 3.5% interest rate), but save you CMHC insurance up front and total interest paid over the life of the mortgage. However, the incrememntal monthly payment is not manageable for everyone, so you must consider the tradoff of savings with what you can afford.
To learn more about calculating your mortgages check out our mortgage calculator.