Many first-time homebuyers may not be familiar with CMHC Insurance Fees until they walk into their first mortgage meeting and find out that they have to pay a lot more money than they initially expected. This can be shocking to a new homebuyer who may have struggled to scrape together a 5-10% down payment. Therefore I feel it is important to help people become aware of these CMHC fees and how they work.
The CMHC, or Canadian Mortgage and Housing Corporation, began insuring mortgages in 1954. The insurance fees they collect protect the mortgage lenders (e.g. banks) from any defaulted mortgages. Back in ‘54, the Federal Government’s main policy goals were to increase housing growth and stability. In the years leading to this policy there had been little housing supply growth due to the Great Depression and World War II. However, there was also an increase in housing demand due to rising incomes and the emergence of the Baby Boom. Therefore the existing housing quantity was inadequate for the growing demand. It was believed that insuring mortgages would make the commercial lenders more likely to lend money, reduce interest rates, and grow housing activity.
Flash-forward to 2015, and we see that CMHC is just as integral to the Canadian housing market as it was in the past. Many first-time homebuyers with a minimal down payment depend on CMHC policy to buy their homes and build a family.
So what does CMHC mean for you? It means that you’ll need to pay an extra percentage-based fee for a down payment that is less than 20% of the purchase price. As well, CMHC and the mortgage lender BOTH need to approve your mortgage application. This can mean more rigid requirements. Read on for more details.
The fees that CHMC charges range from 3.60% to 1.25% of the mortgage amount, and can be seen in the chart below. The percentage that you will pay depends mainly on the down payment amount. The total fee is calculated by multiplying the mortgage amount by the tiered CMHC fee. An Ontario sales tax of 8% is also charged on the CMHC fee.
For example, if you bought a home for $500,000 with a $25,000 (5%) down payment, then the mortgage would be $475,000. The CMHC fee would be 3.6% or $17,100 and $18,468 after taxes. This amount can then be paid upfront or can be added to your regular mortgage payments.
A minor concern is that the bank AND the CMHC need to approve your mortgage application. The CMHC has stricter guidelines than the bank and does not have the ability to bend some rules like a bank does. For example, your bank may approve your mortgage even if your income ratios are 0.5% lower than their requirement on paper, whereas the CMHC will not. The good news is that it’s still fairly easy to get a mortgage approved as long as you meet the general basic approval guidelines that can be planned around.
That’s the story of CMHC and how it directly affects you. Now when you walk into your first mortgage meeting you can feel much more confident knowing what to expect.
Scroll down to sign up for my e-newsletter and I’ll let you know when I write a new blog post or highlight important articles I feel will help you out as you work on getting your finances in order. Helping you grow,