In general, the calculator works like this:
Example home $500,000 purchase price with 5% down payment, requiring a CMHC insured mortgage:
5% down payment is $25,000
Basic Mortgage amount required: $475,000 (95% of the purchase price)
ADD Mortgage Default insurance into the mortgage (4% CMHC fee in this case): $19,000
Mortgage Total INCLUDING mortgage default insurance: $494,000
What are the benefits of an insured mortgage?
Although there is a benefit of avoiding the CMHC mortgage default insurance, there are also several benefits that could lower the overall cost of your mortgage:
Lower mortgage rates: The tantalizingly low mortgage rates that are seen online are usually CMHC insured rates. The mortgage business is very risk-based. So because the CMHC default insurance removes the risk for the lender, this is factored into the rate.
You don’t need to wait longer to save up more down payment to buy your home. Because you are in the home sooner, you are paying down your mortgage, not your landlord (if you are renting). Also, you may see growth in the value of your home which could reasonably amount to 5% increase in 1 year.
Buying a home sooner can not be understood. If in 2 years the value is up 10% more, then that’s extra down payment you will need to save up. So in an increasing housing market, saving is almost a battle against time.
Renewal rates are lower. Although it’s probably the last thing you’re thinking about now, when your mortgage comes up for renewal, for example in 5 years, you will want to have the lowest rate again. If your mortgage is CMHC insured then you will continue to have the lowest rate for the life of your mortgage – including renewal. This is unless the mortgage is refinanced for equity take out. This cancels the insured status of the mortgage.
Based on most math, based on the lower rates, the CMHC fee up to 4% will pay for itself in the second term. In other words, in 7-8 years your lower mortgage default insured rate will pay for itself and for the rest of your mortgage you will actually save more than a non insured rate.
How to lower your CMHC or mortgage default insurance fees
While paying the mortgage default insurance can be worth it for some homeowners, we still want to help ensure that you pay the least amount for mortgage default insurance. Here are some tips to help lower your mortgage default insurance premium:
Ensure that your lender has shopped all 3 mortgage default insurers. Although CMHC is the big name used regarding mortgage default insurance, there are two other mortgage default insurers: Genworth and Canada Guaranty. There could potentially be savings or even a more reliable approval, depending on what insurer the lender selects.
At Altrua, we work closely with the lender to ensure the best insurer is selected for your application.
Getting to the next down payment threshold. You may notice that at 10% down payment the mortgage default insurance fee is lower. Same thing at 15%. So if you are close to the next threshold, it might be worth getting some gifted down payment or saving a little bit longer to get to this next threshold. For example, if you have 9% down payment, then saving hard for 2-3 more months or getting a down payment gift from family may save you thousands of dollars in default insurance fees
Getting to 20% down payment: If you can avoid the mortgage default insurance premium then this could help you save the most, over time. If a gift can be provided from immediate family, or even if the down payment can be borrowed from another resource (this is harder to qualify with) then you may be able to completely avoid the default insurance fee. Even a short term second mortgage could cost less than a 3.10% CMHC fee.
Default insured Mortgage Vs. Non Default Insured Mortgage: Summary
If the CMHC mortgage default insurance can be avoided, this is likely to result in your best savings. Not only would the thousands in fees be saved, but starting out with less mortgage will also be a big help for overall interest savings – even if the rate is a bit higher at 20% down payment.
Also, if you decide to eventually refinance the mortgage to take out equity (for home updating, investments, potential debt consolidation…) it can be more cost-effective to do this with a non default insured mortgage. This is because you would not need to cancel the mortgage default insurance that you initially paid thousands of dollars for.
But it isn’t hard to make the savings argument for a CMHC insured mortgage. If you are renewing into a new mortgage after the mortgage term is up, without refinancing to take out equity, then you will likely continue to enjoy lower ‘high ratio’ insured rates.
Also if you move (to a home valued at less than $1,000,000) then you could port your mortgage without breaking it, and keep the mortgage insured by adding a ‘top up premium’ to any additional mortgage amount applied for. You would not need to repay 100% of the default insurance fee if you port the mortgage when moving.
The point of this article has not been to include an in-depth overview of what mortgage default insurance is. There are several other articles that provide a general overview of this. Instead, our goal is to help you save the absolute most on your mortgage, including on the mortgage default insurance premium. Connect with Altrua to see how we can help you save for your unique application.