Fiscal and Financial Planning Guide 2024-2025
Future owners > Mortgage insurance (Canada Mortgage and Housing Corporation – CMHC)
Mortgage insurance is mandatory when a buyer makes a down payment of less than 20% of the purchase price of the property.
Indeed, if a borrower can no longer make his monthly mortgage payments, the financial institution may seize the property and resell it. If the sale price is less than the amount of the loan, CMHC will compensate the financial institution for the difference and may then sue the purchaser to recover this amount.
Minimal down payment
To be eligible for mortgage insurance, the buyer must be able to make a minimum down payment of 5% if the value of the home does not exceed $500,000, and 10% if the value of the home is between $500,001 and $1,000,000, as illustrated in the table below.
Homes valued at over $1,000,000 are not eligible for mortgage insurance.
Advantages of mortgage insurance
The main advantage of mortgage insurance from the buyer’s perspective is that it could allow them to purchase a property with a down payment as low as 5% to 19.99%, but this comes with a relatively high cost, as illustrated in the following section.
Cost of mortgage insurance
The following table illustrates the cost of mortgage insurance based on the down payment and loan amount relative to the value of the property.
The following table illustrates examples of the cost of mortgage insurance.
It should be noted that the financial institution will pay the premium to CMHC and will generally add it to the mortgage amount.
Make a down payment of at least 10%
The cost of mortgage insurance increases significantly if the down payment is less than 10%.
As illustrated in the table below, if someone makes a down payment of only 5% ($25,000) instead of 10% ($50,000), the additional loan of $25,000 from $450,000 (85%) to $475,000 comes with an additional mortgage insurance premium of $5,050 which corresponds to 20.2% of the additional loan of $25,000. This conclusion is similar regardless of the value of the property. There is therefore a clear advantage to make a minimum down payment of 10%.
By comparison, the mortgage insurance cost for a loan increase from $425,000 (85%) to $450,000 (90%) which is $2,050 which is $3,000 less.
Ensure that your down payment reaches the threshold of 10%, 15%, or 20% and not somewhere in between
It is important to note that the mortgage insurance rate only decreases on the entire loan if the next threshold is reached.
Let’s take again an example for a house valued at $500,000.
If you make a down payment of 15% ($75,000) the cost of the premium will be $11,900, or 2.8% of $425,000.
If you make instead a down payment of $74,950 (14.99%), which is just below the 15% threshold, the cost of the premium will be $13,177 (3.10% of $425,050). The missing down payment of $50 needed to reach a 15% down payment therefore costs $1,277.
Eligible down payment
In order to maximize the down payment, a buyer can use one of the following sources:
- Personal savings
- Gifts from a family member
- In the case of a first-time home purchase:
- First Home Savings Account (FHSA)
- Home Buyers’ Plan (HBP)
- Tax-Free Savings Account (TFSA)
Finally, it should be noted that mortgage insurance could, in some cases, enable the buyer to obtain a more favorable interest rate from the financial institution, given that CMHC guarantees the loan.
Other conditions that must be met to be eligible
The main other conditions for eligibility for mortgage insurance are as follows:
- Canadian citizen or permanent resident;
- The property must be located in Canada;
- Credit score of 600 or higher;
- Ideally, annual housing costs (principal, interest, taxes, and electricity) should not exceed 32% of gross income and 40% when considering repayments on other debts.
Voluntarily insure a mortgage loan with CMHC?
It is possible to voluntarily insure a mortgage with CMHC even if you are making a down payment of 20% or more.
The following table illustrates the cost of mortgage loan insurance.
In these situations, a buyer who voluntarily insures a loan could potentially obtain a more favorable interest rate from their financial institution. To our knowledge, this option is rarely used in practice.
Calculator
Below is a link to a calculator on the CMHC website that allows you to determine the premium amount based on the value of the property and the down payment percentage: https://www.cmhc-schl.gc.ca/consommateurs/acheter-une-maison/calculateurs-pour-lachat-d’une-habitation/calculateur-hypothecaire