As anyone buying property for the first time can attest, the learning curve is steep when you’re a real estate novice. You’re essentially hopping on the Magic School Bus of real estate, but there’s no Ms. Frizzle to guide the way.
When I started saving for a cottage in Ontario earlier this year, I immediately enrolled in the self-directed ‘how to buy a house’ crash course. Early on, I learned about CMHC insurance — the penalty you get dinged with for putting down less than 20 percent on a mortgage. My first impression was unsavoury: CMHC insurance is to be avoided at all costs.
But upon scrutinizing my finances, I realized it will take me years to scrape together the cash for a downpayment over 20 percent, and I want to get into the property market now. With more education, I’ve warmed up to the idea of getting an insured mortgage. And I’m not alone. In an era of rising interest rates and climbing prices — especially in markets like Toronto and Vancouver — many first-time homebuyers are eager to put down what they can, so they can step on the property ladder before it’s too late.
To get some more information on the necessary beast that is mortgage insurance, I spoke to Dan Eisner, the founder and CEO of True North Mortgage and Toronto-based mortgage agent Darlene Hanley from Hanley Mortgage Group.
Let’s start with the basics. What is CMHC insurance?
If you put down anywhere between 5 percent and 19.99 percent as a downpayment, you are required to pay mortgage default insurance. This is not to be confused with mortgage life insurance — which protects your estate if you die before paying it off.
We’re used to insurance protecting us. But in this case, CMHC insurance protects your lender. “If you were to default on your mortgage, CMHC would make good on your mortgage payments with the bank, but then they would still come after you for those payments,” explains Eisner.
CMHC was founded by the Canadian government in 1946 to help returning World War II veterans find housing. Over the decades, the mandate has expanded to help all Canadians. “The government wanted to help first-time homebuyers get into the housing market,” explains Eisner. “They knew if banks did it, it would be very costly for Canadians. It would also be risky and they didn’t want our banks taking on that kind of risk. So they invented CMHC, and outlawed banks from doing mortgages with less than 20 percent down without CMHC.”
Today, there are three providers of mortgage default insurance in Canada. The biggest one is Canada Mortgage Housing Corporation (CMHC), but you can also get an insured mortgage from Genworth Canada and Canada Guaranty. All three are backed by the government and offer identical premiums and access to the same interest rates. With the exact same product, how do you decide which one to go with?
“We leave that decision up to our underwriter,” explains Hanley. “Some underwriters prefer certain insurers — they just have a rapport with them. And sometimes CMHC will do something that Genworth won’t do, for example, depending on the type of building. But I usually don’t pick.”
“From an end-user point of view, it really makes no difference which one you go with,” says Eisner.
How much will it cost me?
The amount of mortgage insurance you pay depends on how much you put down. The price ranges from 2.8 percent to 4 percent (the maximum fee, if you’re putting down the minimum downpayment of 5 percent). To calculate it, first figure out what percentage your downpayment is and match it to the appropriate insurance premium rate. Then you subtract your downpayment from the purchase price and apply the insurance premium to the remaining principal.
So for example, say the condo you want to buy is $600,000 and you put down 10 percent ($60,000). The remaining principal is $540,000 ($600,000 – $60,000). When you put down 10 percent, you pay 3.1 percent in CMHC insurance (since you fall within the 10 percent and 14.99 percent insurance premium category). On $540,000, this means you’ll pay an extra $16,740 ($540,000 x 3.10 percent) over the life of your mortgage.
Those few percentage points don’t seem like much — but as you can see, they easily add tens of thousands of dollars to your total.
How do I qualify?
You can only put down 5 percent for a home that’s $500,000 or less. If you buy a place that’s $750,000, you can pay 5 percent on the first $500,000 and 10 percent on the remaining difference. If your property is over $1,000,000, CMHC won’t be available to you and you’ll have to put down at least 20 percent.
You can’t get an insured mortgage on an investment property (sorry, aspiring landlords), and the maximum amortization available to you will be 25 years, instead of 30 years with a larger downpayment. On top of paying CMHC insurance each month, the shorter amortization translates to higher monthly mortgage payments.
Your credit score will also be reviewed when you’re planning to put down less than 20 percent. “The credit criteria has actually gotten tougher,” says Eisner. “If you have less than a 650, you should be worried. To have a sure thing — with less than 20 percent down — you’d need a 710 or above.”
If you live in Manitoba, Ontario or Quebec, you will also have to pay provincial sales tax (PST) on the CMHC insurance on closing day. It varies depending on where you live. In Toronto, for example, it’s 8 percent. So if your CMHC insurance is $8,000, you’ll have to contribute $640 for PST.
Will the insurance premiums go up in the future?
“When we opened our first location in 2006, if you put five percent down, it actually had a 2.9 percent premium instead of what it is today — 4 percent,” explains Eisner.
The increase isn’t because CMHC has had a lot of losses. “Over the last few years, there’s been a political move to reduce the amount of support the taxpayer gives to homebuyers. In the end, if CMHC goes bad, the government and taxpayers are on the hook. So there’s been this real push to reduce the balance sheet of CMHC.”
How do you decrease demand? “You charge more,” explains Eisner.
How do I pay for it?
You can pay for CMHC insurance in a lump sum, but most people tack it onto their monthly mortgage payments. “It’s actually a one-time payment that gets added to your mortgage every month,” explains Eisner. Say you won the lottery and wanted to buy your house outright. You would still be on the hook for the full mortgage default insurance — even though you only needed it for some of the time. “You don’t get the money back,” explains Eisner.
Will CMHC insurance get me a better interest rate?
When you get CMHC insurance, you have access to slightly lower interest rates. Why? “It’s all about risk,” explains Hanley. “If you default, CMHC covers any shortfalls so investors feel more comfortable.”
But don’t be fooled — over the course of your mortgage, you will always pay more for CMHC insurance than you’ll save with a slightly lower interest rate.
“You might think, ‘Well, maybe I should buy the insurance just to get the lower interest rate,’” says Eisner. “That never works. The math never adds up.”
Should I just wait to save up the 20 percent?
In markets where home values are going up, Hanley recommends taking the hit on CMHC insurance, rather than waiting to save at least 20 percent down. “In Toronto, you’re probably going to get back that CMHC insurance that you’re paying. If you wait two or three years, that house may have appraised that much but you’re still renting and no further ahead,” says Hanley.
For Eisner, it comes down to the amount of time you plan to live in your house. There’s no way to know for sure that home values will go up faster than the rate of your mortgage insurance, but by staying put at least three years, “there’s a good chance.”
“It’s not a terrible decision, because it gets you into the housing market and if it’s inflating in value, you’re along for the ride. If you stay on the sidelines — great, you don’t have to pay that insurance — but you kind of missed out,” says Eisner.
