CMHC is an acronym that many people who have bought or sold real estate are aware of, but what exactly is it and what does it do? CMHC stands for Canadian Mortgage Housing Corporation, and entity that has been around for more than 65 years and is known best for helping Canadians who have less than 20% down payment with the purchase of their home.
How does CMHC help? Primarily this organization helps by providing mortgage insurance that is paid for by the homeowner via a premium on your mortgage. This mortgage insurance will cover the mortgage costs should the homeowner not be able to may payments on their home and are foreclosed on.
Let's take a step back to understand why this was implemented. Traditional home ownership financing was done with a 25% down payment and a 75% mortgage that the banks would finance. Should a homeowner not be able to make payments, the bank would foreclose on the property to retrieve the amount owing on the mortgage, plus the expenses involved with the homeowner not keeping up to date with payments. As home prices rose, the ability to save a 25% down payment became more and more difficult for everyday Canadians. Banks were unable to allow low down payments either, because if the house needed to be foreclosed on, they would be losing money at a fast rate. There was no equity stake in a home purchase for a home owner to lose, and the bank took the bulk of the risk.
Here's where this idea of insuring what is called "high risk" mortgages was born. CMHC protects the bank by securing the mortgage amount and all costs involved in a high ratio mortgage and does not charge the bank for this service. Home buyers are allowed to own their home in a more reasonable manner because they do not need to save $100000 for a down payment.
Here are some things you should know about CMHC mortgage insurance:
- The down payment provided by the home buyer must be a minimum of 5% and must be from their own resources or a gift.
- The property being purchase must be less than $1000000 and be located in Canada.
- The insurance premium is added on afterwards to the mortgage and is part of your monthly mortgage payment. The rate of your insurance ranges from 0.6% of the mortgage amount to 3.35%, depending on how much your down payment is. The more down payment you put down, the lower the premium.
- This program is only to be used in situations where the buyer is purchasing a high ratio mortgage.
- There are many other rules and regulations that may affect you regarding CMHC. Make sure to check with your mortgage expert to see which ones apply to you!
Home ownership is more of a possibility thanks to ideas like mortgage insurance. It is in your best interest to know all about how CMHC can help you before you buy your next home!