Buying a first home is a very exciting and nerve-racking moment in life. It marks a new step, but also comes with a large amount of responsibilities. There are also many hidden expenses that will pop-up and planning for them before they arise can help you avoid some major financial traps.
One of the biggest hidden expenses is CMHC’s insurance fee. This expense often surprises new homebuyers and can easily add an extra $20,000 in expenses to your mortgage. You will also need to pay sales taxes if you live in Ontario or Quebec.
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So what is CMHC Insurance?
CMHC or Canadian Mortgage and Housing Corporation is a governmental entity that insures high-ratio mortgages* that are under $1 million dollars. This insurance protects a mortgage lender from losses that arise if a borrower defaults on their mortgage.
CMHC began in 1954 as a government policy to help house the parents of the populous baby boomer generation and stimulate the housing supply. Mortgage insurance reduces the risks that banks incur from mortgage lending and allows banks to issue more mortgages with lower down payments. This then increases the demand for housing and in conjunction, promotes building development.
*By definition, a high-ratio mortgage is when a down payment is 20% or less.
So Who Pays CMHC Fees?
New homeowners who have a down payment that is less than 20%, but more than the minimum pay CMHC insurance costs. The CMHC fee is based on a series of percentage rates tied to the size of a down payment. This fee is then charged when a mortgage is first issued.
The minimum down payment allowed on CMHC insured mortgages is broken into two tiers. Being 5% for the first $499,999 portion of a home’s cost, and 10% for the portion that’s between $500,000 to $999,999. As mentioned before, CMHC does not insure homes that cost $1 million and over.
For example, the CREA reports that the average home in Canada costs $559,317 (April 2017). This would require a minimum down payment of $30,932 ($25,000 for the first tier and $5,932 for the second tier – rounded.)
CMHC Insurance Fees
CMHC fees are listed as above and range from 2.4% to 4.5%. This percentage is charged on the mortgage amount and not the purchase price. Note: CMHC fees are listed for down payments over 20%, but these are typically not required.
To make matters more expensive, Ontario and Quebec charge sales tax on CMHC insurance fees.
The base CMHC insurance fees can be add to a mortgage, but the sales tax portion must be paid upfront.
CMHC Insurance Example
Continuing our example, a $559,317 home with a minimum down payment of $30,932 would require an initial mortgage of $528,385.
Since this down payment is between 5-9.99% then an insurance rate of 4% is charged. This equates to a CMHC insurance fee of $21,135.
If this is in Ontario or Quebec, then there will be additional sales taxes added to this amount. In Ontario, the sales tax rate is 8%, which would add an extra expense of $1,690.83. This tax expense would have to paid up front.
As you can see, CMHC insurance fees are a large expense that can easily take a new homebuyer by surprise. Understanding and planning for these fees can help reduce the financial stresses of buying a home. All the best in your housing adventure!
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