What is CMHC? And what does it have to do with my mortgage?
The Canadian Mortgage and Housing Corp., better known as CMHC, plays an important role in helping Canadians buy a home.
CMHC has been around since 1944, when it was created by Parliament to provide low-cost housing and affordable mortgages to Second World War veterans returning home.
Today, among other things, it provides mortgage insurance for buyers who otherwise might not be able to buy a home.
People sometimes get mortgage insurance confused with life insurance that covers your mortgage in the event of death. While this sort of life insurance protects your family by paying off the mortgage, the mortgage insurance provided by CMHC protects the lender and thereby allows you to provide a lower down payment when you buy a home.
But first, let’s step back and explain what a mortgage entails. Basically, a mortgage is a loan that you use to buy a home. When you sign a mortgage contract, you are signing a legal agreement to repay the loan, plus interest. Your home acts as security on that loan, and if you stop making payments, the mortgage lender can take possession of the property and eventually sell it.
That can lead to a loss for the lender if the sale price of the home doesn’t cover the balance of the mortgage. And a lower down payment increases the risk of such a loss.
That’s why mortgage insurance is mandatory in Canada when your down payment is less than 20 per cent of the value of the mortgage. CMHC provides mortgage insurance to protect the lender against the risk of a default, and as a result lenders are willing to provide mortgages to buyers that otherwise might not qualify.
In addition to CMHC, there are two private mortgage-insurance providers: Genworth Financial and Canada Guaranty Mortgage Insurance.
The premium for mortgage insurance is the same for all three providers. It ranges from 1.80 per cent to 3.15 per cent of the mortgage amount, depending on the amount of your down payment. Although the premiums are the same, the three insurance providers sometimes have different approval criteria.
The insurance premium is typically added to the amount of your mortgage. For some buyers, there are alternatives available to reduce or even eliminate the need for mortgage insurance, but that is a discussion you should have with your adviser, such as a mortgage broker.
Your real-estate professional may refer you to mortgage brokers who can do all the legalwork and find the best rate for your mortgage. Your mortgage broker can also help arrange for the purchase of mortgage insurance from one of the three providers if you don’t have a 20-per-cent down payment. You can also work directly with the lender of your choice.