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CMHC Loan Insurance – How It Works and How it Can Be Improved

Last Updated on December 11th, 2018

by David Larock

When lenders receive applications from mortgage borrowers who have down payments of less than 20% (who are also known as high-ratio borrowers), they must secure high-ratio mortgage-default insurance from one of three insurers: CMHC, Genworth and Canada Guaranty. (CMHC is by far the biggest, so high-ratio default insurance is often loosely referred to CMHC insurance).

Every high-ratio mortgage application must pass through the insurer’s filter, and as such, they set the rules that every high-ratio borrower (and lender) must comply with. (In reality, because mortgage default insurance comes with a government guarantee, insurer policies are also heavily scrutinized by our Federal Ministry of Finance.)

High-ratio mortgages are held to tougher standards that are designed to ensure that banks do not expose their depositor’s money to undue loan risk. After all, if we worried that our bank might lose our chequing account money to bad mortgage loans, it would undermine our confidence in the entire banking system. And well, we can’t have that.

This lending structure helped us fare well during the global financial crises in 2008, and it has been held up to the world as a model to be copied. So kudos for that. But as with every system, it also has its drawbacks. For example, every lender offers the same high-ratio products using different names and different-coloured pamphlets.

Ideally, CMHC (which is government owned and run) would act as a ‘market maker’ to ensure a minimum standard for high-ratio borrowers. Then, its private-market competitors (Genworth and Canada Guranty) would augment CMHC’s offerings with more flexible solutions that find a balance between risk-based pricing and investor demand that ebbs and flow in response to market conditions. But we’re getting ahead of ourselves. Let’s start with the basics.

As mentioned above, if you want to buy a house with a down payment of less than 20% of the purchase price, you are required to buy insurance that protects the lender against loss if you default on your payments. (This coverage doesn’t relieve you of your debt obligation if you default, but it ensures that the lender is made whole.)

Thecanada mortgage rates amount you are charged increases as your down payment decreases, and your cost generally ranges from 1.7% to 4% of your mortgage amount.

You can roll the fee into your mortgage but you have to pay any associated provincial sales tax upfront, as part of your closing costs.

The default insurers have programs for self-employed applicants, new immigrants and a whole host of other groups (see links provided in the opening paragraph for further details).

Your mortgage loan insurance is fully transferable to a different lender if you find a better deal at renewal, and if you want to increase your original loan amount at some point in the future, you only have to pay an insurance fee on the additional amount borrowed (subject to qualification).

Now how can we make default insurance better?

CMHC is a crown corporation and it competes with Genworth and Canada Guaranty, which are privately owned.

In a perfect world, the private insurers toronto mortgage brokerwould be allowed to be more innovative and to offer borrowers more flexibility, but in reality, CMHC has discouraged this by matching every innovation made by Genworth and Canada Guaranty in order to protect its dominant market share in much the same way that a private company would.

Examples in recent years include stated income lending for self-employed borrowers, mortgages for new immigrants, and loans for borrowers with lower credit scores.

Unlike a private company, when CMHC copies a new-product innovation, they also commoditize the pricing. Then, with profit margins reduced for the private insurers, the attractiveness of taking on incremental risk diminishes. While on the surface that sounds like a good deal for consumers, in reality, it discourages innovation. After all, why would a private insurer spend time and effort coming up with a new product when it will just be copied and commoditized by the government-run hegemon?

Having a centralized policy for high-ratio underwriting risk has given the government no small amount of control over our residential market. Given the US example of what happens when lending runs amok, maybe that’s not entirely bad. Especially when you consider that since CMHC started assuming the risk for high-ratio mortgages, it has opened up home ownership to a huge swath of middle-class Canadians and was an important catalyst for the democratization of Canadian credit. Since that time (1954), our home ownership levels have been rising steadily and are now among the highest in the world.

It’s just too bad that CMHC’s influence also serves to discourage private-market innovation.

In the end, a more innovative default-insurance market that more fully embraces risk-based pricing is the ideal we should be shooting for. CMHC’s policies should establish a baseline standard, but then our private insurers should be left to findbest mortgage rates canada innovative ways to ensure that every willing investment dollar is matched with borrowers who need additional flexibility to qualify (and who are willing to pay more for the privilege).

Just like with any government-run market-making institution, CMHC should try to foster an environment where private-sector companies can innovate without being overwhelmed by their public-sector competition.

David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
71 Comments
  1. Hi Ro,

    The CMHC fee is a one-shot deal as long as you aren’t adding to your mortgage at renewal, even if you decide to switch lenders.

    Best,
    Dave

  2. Chris Ellis permalink

    During the course of the mortgage can you pay off the CMHC fee in a lump some instead of on your mortgage each month.

  3. Hi Chris,

    The high-ratio insurance fee is rolled in to your mortgage unless you pay the balance upfront (which almost no one does).

    While you can’t specifically pay off the fee, any good mortgage allows lump-sum payments and this will enable you to make a prepayment that is equivalent to the fee charged, which achieves the same end.

    Best,
    Dave

  4. Yann permalink

    If a lump sum of 10%is made in year 2 and year 3, making the mortgage low-risk ratio, will cmhc premium be reimbursed

  5. Hi Yann,

    The premium is charged as a one-time upfront fee and is not reimbursed based on future prepayments.

    Best,
    Dave

  6. Josh permalink

    Hi I am selling my house and buying a new one, I payed CMHC on 234.000 put down 5%. I am buying a new one for 400,000 And have Equity of around 40,000 owing around 210,000. Do I have to but down 80,000 on my new house to not pay CmHc or do I only have to put down 20% of the top up money on am boring
    Thanks josh

  7. Hi Josh,

    If you want to avoid paying any higher-ratio insurance premium you will have to put down 20% of the full purchase price of the new property. That said, if you are putting down less than 20% you should be able to port your existing insurance policy over to your new property, and if you do this, you would only have to pay a “top-up” insurance premium on the additional amount you need to borrow.

    Best regards,
    Dave

  8. Morgan Somerville permalink

    Hi David,

    I just bought a house in Nov/16 and had to get CMHC Loan Insurance. Will I have to pay for this insurance until my mortgage is paid in full? If so does the premium that I pay decease as my mortgage is paid off?

    Right now I pay about $2288.00 a year, so in 5 years when I go to renew my mortgage will this decease?

    Thank you Dave

  9. Hi Morgan,

    The high-ratio insurance fee is a one-time fee that typically gets rolled in to your mortgage balance at the time of funding (unless you choose to pay it with cash upfront).

    When you renew your mortgage in five years, if rates are the same as they are today your payment will go down because you will be starting a new term with a lower mortgage balance.

    Best regards,
    Dave

  10. John permalink

    Is CMHC required for mortgages with the seller of the house?

  11. Hi John,

    Are you are referring to a vendor take-back mortgage? If so, then this loan would be considered a private mortgage and as such, would not require high-ratio mortgage insurance.

    Best,
    Dave

  12. Grant permalink

    Dave,

    Wanting to buy a second home and turn my current home into a rental property, the house is 7 years from being paid off and the rental will cover this mortgage and taxes.
    Debating if I draw equity to put 20% on the new home or as little as possible and have a cmhc backed loan in case things go south will this protect my rental property assuming the default covers all costs associated with the default?

    Thanks! Grant

  13. Hi Grant,

    To clarify, default insurance covers the lender against loss, not the borrower. If you were to default on a mortgage the insurer would come after you for all related costs, and if you owned an additional property I imagine that they would try include your equity in that as part of any settlement.

    Best,
    Dave

  14. Phil Hernandez permalink

    Hi Dave

    Trying to close a deal on a property with a list price $50K over assessed value (from July 2017) and offering $50K over that which my realtor assures me is not mental (Vancouver condo market). Genworth wants to appraise the unit which is not unreasonable. Two questions: 1. How long do you think it will take for Genworth to complete their appraisal (in other words how many subject days should I write into the offer)? 2. Is a partial underwriting possible, i.e., could Genworth come back to the lender and say “we will underwrite only $495K; your borrower will need to pay the difference ($15K) out of his own pocket (or arrange different financing for that portion)”?

    Thanks
    Phil

  15. Hi Phil,

    Appraisals typically take anywhere from 2 to 5 business days, but that depends in part on the availability of the current occupant.

    Genworth and the lender will lend on the lower of the purchase price or the appraised value, so unless there is a material defect that is uncovered in the appraisal, they will simply underwrite at the appraised amount and you will need to make up the difference from your resources.

    Best,
    Dave

  16. Stefan permalink

    Hello David,

    My wife and I bought a home 5 years ago and only put down 10% at the time, so we are now paying the CMHC. Our maturity date is coming up next month, and we’ve recently put down a $50,000 lump sum towards the principal of the loan. This now means me have more than the 20% put in towards the loan.

    My question now is, upon renewal next month, do we still have to pay into the CMHC insurance, or will it be taken off?

    Thanks

  17. Hi Stefan,

    The default-insurance you paid for when you bought was a one-time charge, so there is no additional cost for you to keep it in place at renewal (and that coverage attached to your mortgage even if you switch to a new lender at renewal).

    FYI – that default-insurance entitles you to lower rates with many lenders so you are well advised to keep it in place for as long as you can!

    Best regards,
    Dave

  18. Melissa Jones permalink

    Hi Dave,
    I have a high ratio mortgage. Next summer I can renew. I am not sure how the renewal process works. Will it become a conventional mortgage now?

  19. Hi Melissa,

    If your mortgage balance is now less than 80% of its current value then it would become a conventional mortgage at renewal. That said, if you just roll the balance and don’t make any changes to it when your existing term expires, your default-insurance policy will remain in place (even if you switch lenders).

    That’s important because in many cases, that default-insurance policy will entitle you to lower rates on your next mortgage.

    Best regards,
    Dave

  20. Manny permalink

    Great answers and article!

    Question is : we didn’t want to pay chmc insurance and had 20 pc down however appraisal came in 60k bellow offer price. Now we are forced by the bank to roll that 60k in and go below 20 pc down (ie 14 pc down) so we are having to pay insurance fees.

    Not happy about this but question is how easily can we get out of chmc loan after say a yr or two. provided the value and appraisal supports an increase in value say to 900k. Then can we refinance at 80 pc LTV and get out of paying cmjc ins premiums?

    Essentially how easy is it get out of cmhc mortgage to a non cmhc on the same property (owner occupied)

    Thanks in advance!!

  21. Hi Manu,

    Thanks for your email.

    In answer to your question, CMHC charges a one-time fee that is non-refundable.

    Best,
    Dave

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