Everything you need to know about CMHC fees

Buying a home can be a daunting process. There is a long list of things you have to do in order to qualify for a mortgage and ultimately purchase a home.

In Canada, one of the most important organizations to familiarize yourself with during the home buying process is the Canadian Mortgage and Housing Corporation (CMHC). To secure a mortgage loan, you may need to work with the CMHC at one point or another. Because of the integral role this entity plays in the Canadian home buying process, it is important to educate yourself about what it does, and the kinds of fees you can expect from CMHC-sponsored mortgage insurance on higher-risk loans.

What is CMHC?

In 1944, Parliament created CMHC to provide World War II veterans with affordable mortgages. Now, the program has expanded to provide a variety of services to prospective home buyers, including the insurance coverage they need for mortgage approval from a lender. Because a lender must have confidence in any investment its makes through mortgage loans, most loans cover 80 percent or less of the total value of a home. This leaves the home buyer to pay 20 percent or more upfront as a down payment.

CMHC is able to assist homebuyers by providing insurance that offers extra security to lenders. These lenders offer loans to buyers who only pay between five and 20 percent of a home’s value for a down payment. The purpose of CMHC is to act as mortgage insurers and insulate lenders against default and protect the profitability of their investment. CMHC offers mortgage loan insurance that is distinct from other types of home insurance, such as flood and fire protection.

Like with other insurance, you must pay a premium for the cost of your CMHC insurance. This premium will differ depending on the value of the home you are purchasing and your lender. You can anticipate paying anywhere between 1.8 percent and 3.15 percent of your home’s value to cover CMHC premiums.

What are CMHC fees?

The insurance premium you pay for mortgage insurance through CMHC is also known as CMHC fees. These insurance fees are an important aspect of the CMHC mortgage insurance process. Prospective home buyers and lenders have distinct needs and goals in mind during the home buying process—and all of them are important. Although the goals of these parties may not always align perfectly, it’s essential that each party has the opportunity to negotiate a deal that makes the most financial sense.

For home buyers, it makes the most financial sense to limit the upfront amount they have to pay for a home. The larger the down payment is, the longer it will take a buyer to save up, which means they may have to pass up on properties they love. They may even be left spending more after saving for additional months or years.

A lender is responsible for making sound investments. These should have as little risk and as much profitability as possible. When it comes to home loans, lenders tend to insulate themselves from a loss by asking for buyers to put at least 20 percent of the value of the home down right away. This contribution of 20 percent or more by the home buyer gives the lender a buffer that prevents it from sustaining a loss in the event a buyer defaults on payments or the home decreases in value.

Although many lenders will work with buyers who can only afford a down payment of between 5 and 20 percent, they need some assurance that they will not ultimately lose money on the deal.

CMHC mortgage insurance offers a financially advantageous solution to both the lender and the borrower. The borrower can purchase a house with a much smaller down payment than they would with a conventional mortgage, and the lender is insulated against the risk associated with low down payment mortgage loans. The CMHC premiums that buyers pay make it possible for the entity to protect a lender in the event of default. Through CMHC mortgage insurance, buyers and lenders can both meet their financial obligations while keeping risk to a minimum.

As mentioned earlier, CMHC rates are between 1.8 percent and 3.15 percent of the value of the home you are buying. The nice thing about CMHC rates is that you can choose a payment option that truly suits your needs. If you want to pay the premium upfront, you may opt to pay CMHC fees in one lump sum when you receive a mortgage approval.

Alternately, you can spread out these payments over your mortgage term by simply having the insurance premium cost added to your mortgage. That way, you can make reasonable monthly payments over time, at the same time that you pay your mortgage. This is a good option for individuals and families who have a limited budget, as CMHC fees may only add about $20 to your monthly mortgage payments.

How are CMHC fees calculated?

Although CMHC mortgage insurance is an essential financial buffer for lenders, nobody likes paying fees. If you need to pay additional money to buy your home on top of all of the other accompanying expenses, it is important that you know whether there is anything you can do to reduce your total CMHC rates. Before you can focus on reducing your CMHC fees, you must understand how the calculations are made and the varying factors that affect them.

The two primary factors that will influence your CMHC rates are the total value of the mortgage loan you need and the loan-to-value ratio. A loan-to-value ratio is a term that describes the value of the asset you are purchasing in relation to the amount of the loan you need. If a purchase price for home is $200,000 home, pay $20,000 as a down payment and apply for a mortgage loan to cover the remainder, your loan-to-value ratio is 90 percent.

Although actual rates can change over time and are based on different factors, it is safe to say that your CMHC fees will increase as the loan-to-value ratio increases. This is because CMHC assumes a greater risk for a higher ratio loan. The less that’s paid upfront for a home, the less likely it is for a lender to recoup its investment in the event of a default—and the more capital CMHC will have to contribute to bridging the gap.

Although it may seem obvious, it is worth noting that a greater home value will result in higher CMHC fees. Because CMHC premiums are based on a percentage of the home value, a person buying a $300,000 home will pay more than someone purchasing a $150,000 home. You can use the information you have about the home value and loan-to-value ratio to estimate what your CMHC rates might be, but it’s difficult to make a precise estimation.

The best way to avoid being blindsided by CMHC insurance is to speak to a Canada mortgage broker or consultant as soon as possible so that they can walk you through the process and help you understand the charges that will be allocated.

Can I avoid CMHC fees?

Now that you know a little bit more about CMHC fees, you are probably wondering whether there’s anything you can do to reduce the amount you have to pay—or if you can avoid the fees entirely.

When it comes to avoiding CMHC fees, you are likely out of luck if you’re paying less than 20 percent as a down payment. As soon as you apply for a high ratio mortgage, the lender will automatically incorporate CMHC insurance into the application process. Even if there was a way to technically avoid the fees, you would be outside of compliance with federal government regulations that govern mortgage allocation.

The good news is that you can minimize the amount you will have to pay for CMHC mortgage insurance. The more you save for a down payment, the lower your loan-to-value ratio is and the less you will have to pay for CMHC premiums. If you can, try saving up for a few more months, or even a couple of years, so that you can come to a lender with a much larger down payment.

As long as you are saving more for your down payment, consider the benefits of saving up at least 20 percent for a down payment. In fact, paying 20 percent as a down payment is the only way to avoid CMHC fees. A larger down payment may also allow you to secure a better interest rate and will reduce the amount of time you have to spend paying off your mortgage.

While saving 20 percent or more for a down payment may seem like an insurmountable task, it is the most economical choice in the long term for many prospective buyers. Consider the amount that you will have to pay for CMHC insurance—upfront or over time—and think about what you could do with that money instead if you focus on saving enough for a conventional down payment.

The benefits of CMHC fees

the benefits of cmhc fees

As mentioned previously, CMHC is essential to protect lenders from risk, but these fees benefit buyers, as well. Without a program like CMHC, buyers who are unable to pay 20 percent or more in a down payment on a home may be prohibited from investing a house. CMHC gives buyers the freedom to get a mortgage without the limitations and financial burden that usually accompany higher risk loans.

There are lots of really great benefits of paying CMHC fees, including the following:

  • Lower down payment: CMHC gives you the freedom to buy your own home without saving 20 percent or more for a down payment. This is a great option for first-time home buyers who can afford to make monthly payments but don’t have a large enough reserve to cover a large down payment. By purchasing a home sooner, you can stop renting and start making monthly payments that actually go toward the long-term ownership of a property.

  • Versatility: Many people who purchase homes with a smaller down payment feel limited in the types of housing available to them. Because CMHC is a national program with a type of insurance that’s also offered by a host of private companies, it applies to many different types of housing, from condos, single-family homes, to mobile homes. This gives you the freedom to purchase a home that’s right for you, your family and your budget. It basically provides with housing affordability for more people. 

  • Availability: There are no geographical limitations on the CMHC mortgage insurance program. Home buyers across Canada may access this mortgage default insurance to purchase a house in the region of their choosing. Because CMHC is a federal program that’s been around for many decades, lenders across the country have vast experience with the process and understand the benefits of protecting themselves from risk through the insurance.

  • Protection from unfavourable loan terms: Outside of mortgage insurance, lenders may allocate unfavourable rates and terms to insulate themselves from risk. Usually, riskier loans come with much higher interest rates. Over time, this interest rate can really add up, and you may end up paying much more for your house over time. Although it’s usually necessary for lenders to apply higher interest rates to loans that come with a higher risk of default, it can make your payments much higher and may prevent you from finding a house you can afford to pay off with interest. CMHC is a relatively affordable way to offer protection to the lender while making mortgages with reasonable interest rates available to prospective home buyers.

  • Economic growth: Individuals and families buying homes is good for the economy, and CMHC mortgage has facilitated much of Canada’s residential real estate purchases. By creating a mandatory home loan insurance program, the Canadian government made it possible for lenders to work with home buyers who need an unconventional mortgage arrangement. This gives Canadian citizens more freedom to buy homes and gives lenders the protection they need to finance these purchases.

Frequently asked questions about CMHC fees

What are the specifics of a mortgage agreement?

To fully understand CMHC, you have to understand the basics of a mortgage. A mortgage is a loan provided by a bank or lender that borrowers use to purchase homes with the understanding that they will pay the loan back in monthly increments over a long period of time. Actually, an amortization period for a mortgage can be anywhere between five and 35 years, where five-year term mortgages are least expensive, but the monthly payments are higher. Sometimes you may be able to pre-pay your mortgage faster, but most times there are closing costs for paying early. 

A written agreement specifies the terms of a mortgage to which both the lender and the borrower are contractually obligated to adhere. In the event that the borrower defaults on the loan, the lender can acquire the property to compensate for the debt the buyer still owes on it. Traditionally, lenders require a 20 percent down payment to minimize the risk they assume when funding the purchase of a home. In Canada, mortgage and housing are often closely connected to CMHC. 

What are the standard down payment requirements?

Usually, people must provide upwards of 20 percent as a down payment for the purchase of a home. With CMHC, the down payment can be less than 20 percent and may be as low as 5 percent. With CMHC, a home buyer can purchase a home with a 5 percent down payment if it’s less than $500,000. For homes that are more than $500,000, the down payment is 5 percent for the first $500,000 and 10 percent for the additional cost.

Why does my lender need me to pay CMHC fees?

A lender has the responsibility to make profitable investments and finance loans that borrowers are likely to pay within the allotted amount of time. Home buyers who are unable to pay for a down payment of at least 20 percent are a higher risk investment for a lender. CMHC insulates lenders from risk and the lender passes on these fees to the borrower. Without these fees, your lender will not have the security it needs to approve your mortgage application or aid you in the financing of your home purchase.

Are there restrictions on what home I can buy with CMHC?

Although CMHC does offer quite a bit of flexibility to prospective buyers, you may not be able to purchase just any home on the housing market with CMHC insurance. Homes that have a value of more than $1 million, for example, are not eligible for CMHC mortgage insurance.

How do I get CMHC insurance?

Because CMHC has been around for so long, the process to apply for this mortgage insurance is relatively straightforward. Your lender is responsible for facilitating CMHC insurance for your mortgage, and it will be able to walk you through the process. Even though your lender will file your application for CMHC automatically, you won’t necessarily receive CMHC coverage right away. Your lender and the entity issuing mortgage protection insurance will need to review your application and render a decision based on the applicable circumstances.

Who’s responsible for CMHC fees?

Even though CMHC is primarily geared toward lender protection, your lender will pass these costs on to you: the buyer. As a prospective borrower, you have to convince a lender that you are capable of paying a loan off over the designated period of time.

With conventional mortgages, you do this by offering at least 20 percent as a down payment and having a favourable credit rating and strong financial history. With a higher ratio loan, you will ask the lender to assume much more risk by issuing you a loan, and so it will ask you to pay for the cost of insuring your loan through CMHC.

What are my options for purchasing another home?

After using CMHC to insure a mortgage loan, you might be wondering whether you can use a similar product, other than your insured mortgage, from CMHC to purchase a new home. You will be happy to know that you may be eligible for something called "mortgage portability" if you are a current user of CMHC. Mortgage portability allows you to purchase a new home while reducing or avoiding mortgage insurance premiums. To find out more about whether you can take advantage of mortgage portability, be sure to speak with your mortgage lenders directly. 

Are you still not sure if CMHC mortgage insurance is right for you? The truth is that everyone has a different path to home-ownership. Maybe you need to get in a home now, or maybe you can afford to wait a few years so that you can ramp up the amount you have saved for a down payment.

There are so many different factors that come into play that it’s essential to get as much information as possible ahead of time. Speak with a trusted mortgage or financial adviser to get all of your questions answers when it comes to CMHC and the mortgage process as a whole.

MortgagesGlenn Carter