Top Five Questions About CMHC Insurance
Canadian homebuyers with 20% or less for a downpayment are required to pay CMHC insurance. With almost half of all homeowners paying CMHC fees, it’s surprising how few actually know what it is.
Canadian first time home-buyers are quite often surprised to discover that in addition to their mortgage payment and property taxes, they also must pay CMHC insurance, if their downpayment is small. CMHC fees are commonly confused with mortgage life insurance, title insurance or mistakenly thought of as payment insurance. However, it’s actually mortgage default insurance.
To shed a little light on the subject, here are the answers to five of the most commonly asked questions when it comes to CMHC insurance.
- Who is CMHC? CMHC stands for the Canadian Mortgage and Housing Corporation. It is a federal entity dedicated to regulation and insurance of high ratio mortgages.
- Who needs CMHC? Any home-buyer in Canada who enters into a high ratio mortgage (less than 20% downpayment), needs CMHC or other mortgage insurance in order to get a mortgage. Another common mortgage insurer, not federally owned, is GenWorth.
- What does it insure? CMHC is insuring the amount of money the home-buyer borrowed from the bank for the mortgage. It does not cover things like fire, title and deed or market liability. CMHC is in place to protect both the homeowner and the financial institution in case of default or foreclosure.
- Who pays the insurance premiums? The homeowner pays the premiums as part of their mortgage payment. The payment is calculated according to the amount of the mortgage and the amortization. In the event the property is sold and the mortgage is paid off before maturity, the remaining balance of the CMHC payments must be paid.
- Who gets the payout? In the event of foreclosure, the lender takes possession of the property and sells it to recover the remaining mortgage amount. Should the property sell for less than what is owed on it, CMHC pays the outstanding balance to the mortgage lender. This enables the lender to recover what is owed to them without taking legal action against the homeowner.
As you can see, CMHC allows home-buyers without a conventional 20% downpayment the ability to purchase a home. In the rare event that the homeowner cannot meet the mortgage obligations, CMHC pays off remaining balance not covered from the proceeds of the sale. The mortgage lender gets paid without having to sue the homeowner. All in all, one of the best “just in case” programs out there.
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Published in: Personal Finance
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