Mortgage insurance is always a good idea, no matter how big your down payment is, or how much premiums are. In the long run, you’ll save money. When you have a lawyer like Minhas Lawyer services on your side, you will find the path to home-owning very rewarding. Let’s take a look at the Canadian Mortgage and Housing Corporation mortgage insurance premiums in mortgages.
What are the Canadian Mortgage and Housing Corporation?
Canadian Mortgage and Housing Corporation, or CMHC, is a body created by the Canadian Government to provide affordable housing at low-cost mortgages. Among other things, CMHC provides mortgage insurance for buyers who otherwise might not be able to buy a home. This mortgage insurance, among other things, provides protection to lenders in case the borrower goes defaults in mortgage payments. However, mortgage insurance also allows borrowers and buyers to provide lower down-payment when they buy a home.
What is Canadian Mortgage Loan Insurance?
A mortgage is a loan that you use to buy a home. When you sign a mortgage commitment, you are signing a legal contract to repay the loan, plus interest. If you stop making the mortgage payments, the mortgage lender may take possession of your home and may sell it to recover its loan. This can lead to a loss for the lender if the sale price of the home doesn’t cover the balance of the total mortgage loan. And a lower down-payment by the buyer increases the risk of such a loss. That’s why mortgage insurance is mandatory in Canada if down-payment is less than 20 percent of the value of the mortgage.
CMHC provides mortgage insurance to protect the lender against the risk of default, and as a result, lenders are willing to provide mortgages to buyers that otherwise might not qualify. As we mentioned above, CMHC is created by the Canadian Parliament. However, there are other mortgage insurance companies: Genworth Financial and Canada Guaranty mortgage insurance provide mortgage insurance to lenders. These companies are private. All these companies including CMHC charge the same amount of mortgage insurance premiums.
CMHC Insurance is also known as Default insurance, and you are required to get it if your down payment is less than 20% of the price. This is because the lender needs to be protected if you can’t make monthly payments. Loan insurance also allows clients to buy homes for a minimum down payment of 5% and rates similar to those given with larger down payments. Provincial sales tax will be added.
Mortgage Insurance Premium Cost
An insurance premium is calculated as a percentage of the mortgage and depends on the size of your down payment. The premium amount is calculated by dividing the mortgage loan by the home’s purchase price, otherwise called the loan-to-value ratio. Your lender pays the premium but usually passes the cost to you, and gives you the final cost when you apply for the mortgage. The premium can be added to your mortgage to be included in the monthly payments, or you can pay it in a lump sum.
There are many online calculators that can be helpful. However, you may also use a mortgage calculator at Minhas Lawyers’ website to calculate the mortgage insurance premium. Some basic numbers are below:
- Calculate your down payment as a percentage of the home price. For example, if you have $40,000 for a down payment, and the house costs $300,000, you would divide the down payment by the house price. The percentage would be 13.33%.
- Calculate what your mortgage amount would be. Do this by (using the numbers above) subtracting the down payment from the home value. It is $260,000 in this case.
- Calculate your mortgage insurance premium. Multiply the $260,000 mortgage amount by the 3.10% premium to get the $8,060 final premium.
If numbers throw you off, don’t worry. You can always speak to our skilled real estate lawyers at Minhas Lawyers LLP legal Services. Our Real Estate Lawyers will explain to you the complete home buying and mortgage process. Their knowledge will put you at ease as you make home-owning decisions.
Minhas Lawyers LLP is a multi-practice law firm based in Mississauga. We advise and represent clients across various segments and practice areas.
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