. Mark Fidgett, a mortgage broker in Vancouver Canada, explains high ratio insurance and high ratio mortgages and the costs invloved. As seen on my blog
We’ve all heard of insurance, in fact, it’s common place to pay for insurance for some type of protection.
Well CMHC (Canadian Mortgage & Housing Corporation) mortgage default insurance is also a protection, BUT not for you.
It protects the bank (lender), BUT YOU pay.
That’s right, you pay in order to protect the bank in the event that you default and can’t pay your mortgage.
I’ve heard so many definitions of when this CMHC insurance is required.
You must pay CMHC mortgage default insurance if your down payment is less than 20% of the purchase price of your home.
This is called a HIGH-RATIO MORTGAGE.
If you can muster up at least 20% of the purchase price of your home as a down payment, you will have what is referred to as a conventional mortgage.
In this case, CMHC mortgage default insurance is not required.
Mortgage default insurance is provided by three companies. CMHC being the largest and most commonly referred to.
Canada Mortgage and Housing Corporation (CMHC)
Canada Guaranty Mortgage Insurance Company.
The premium —that is, the actual cost of CMHC mortgage default insurance, varies depending on the percentage you have as a down payment: the bigger your down payment, the lower your CMHC mortgage default insurance premium. Usually, CMHC mortgage default insurance premiums vary from 0.5% to 3% of the borrowed amount.
Example: CMHC Mortgage default insurance premiums
Mary’s down payment of $20,000 is 5% of the $400,000 purchase price.
Because her down payment is less than 20%, she will need to get CMHC mortgage default insurance.
Lets assume that
the CMHC premium is added to the mortgage of $380,000 (you don’t pay for it up front, it’s added to the mortgage)
the CMHC insurance premium rate is 2.75%
the mortgage will be amortized over 25 years (Add .20 for a 5 year longer amortization)
the interest rate is 5%.
The CMHC mortgage default insurance premium will cost $380,000 x 2.75% = $10,450
The total mortgage loan would then be $380,000 + $10,450 = $390,450
In the above example, this CMHC mortgage default insurance would cost Mary $10,450 and would be added to the mortgage total.
The monthly payment would increase from $2,211 to $2,271.
As you can see in this example, Mary can elect to put 20% down ($80,000) and not pay the CMHC high ratio mortgage insurance or increase her monthly payment by $60 and put only 5% down.
While you would benefit from having a 20% down payment, in both interest and premiums saved, CMHC mortgage loan insurance serves a purpose by allowing people to buy a home with a smaller down payment. Being insured against loss, the bank is less concerned about the higher risk they take on, which allows the buyer to stop renting and start building equity in a home of their own.
Mark Fidgett, Your Vancouver Mortgage Broker For Life
P.S. Who’s the next person you know who wants to save thousands off their mortgage?
Be sure to give me a call so we can help them!