CMHC fees

Your Mortgage Guide

The Purpose of CMHC And How To Avoid CMHC Fees:

Looking for ways to avoid CMHC fees? Canada Mortgage and Housing Corporation or the CMHC is the most prominent federal agency you have to work with during the home buying process. Your understanding of CMHC, its rulebooks, and fees are essential when you are trying to secure a mortgage loan in Canada. As it facilitates homebuyers to afford housing through insurance and incentives, a large number of buyers end up paying additional CMHC fees in their monthly mortgage payment.

However, there are ways to minimize and even avoid CMHC fees that may contribute to reduced monthly mortgage repayment and overall total loan cost. This entails the need on your part to educate yourself about the purpose of the federal agency, what benefits it serves for home buyers, how helpful to have the mortgage insurance, and how to avoid CMHC fees.

The History and Objective of CMHC

The CMHC came into existence in 1946 to create and facilitate affordable housing for thousands of soldiers returning to Canada after World War II. With a large influx of post-war immigrants, its responsibilities covered the implementation of national housing programs, loan guarantee schemes, and the provision for discounted funding of loans and mortgage lenders. The authority gradually expanded to all types of public housing projects supported by federal funds.

To make homeownership more accessible, the CMHC started mortgage loan insurance in 1954 underwriting housing loans with less than 25% down payments. This helped homebuyers unable to pay more than one-fourth of the purchase price as down payment to access mortgage loans. Lenders tapped with an assurance of defaulted loan reimbursement were happy to allow loans to Canadians with a reduced down payment. Mortgage borrowers, on the other hand, were asked to pay CMHC fees as insurance premiums to get home loans at small down payments. The insurance underwriting turned automatic in 1996 enabling home buyers to get mortgage loan insurance conveniently.

Three years later, the CMHC introduced a minimum 5% down payment with mortgage insurance buying. A 10% “green refund” incentive on the premium paid exclusively for energy-efficient homes.

Today, the CMHC is entrusted with

  • Providing mortgage loan insurance for Canadian homebuyers
  • Funding affordable housing projects in Canada
  • Offering an incentive to first-time homebuyers through subsidized loans
  • Looking after the housing needs of First Nation communities
  • Housing market analysis and inputs for federal housing policy
  • Securitization of residential mortgages to encourage lending

What Are CMHC Fees?

The premium paid for CMHC mortgage insurance is known as CMHC fees.

The primary objective of CMHC is to enable all Canadians to afford homes. While not all homebuyers can afford a 20% down payment, lenders are not open to approving loans to borrowers with reduced upfront payment. A low down payment is often viewed as a risk. Without substantial investment, the borrower is more likely to default. This dissuades lenders from permitting less share of the homebuyers in the payment.

On the other hand, a higher down payment means many have to wait for years to amass adequate finances to pay for it. This may severely impact their ability to own a house. To assist homebuyers to receive loans with less down payment, the federal agency fixed the minimum required down payment as low as 5% of a home’s value up to $500,000. Simultaneously, to insulate lenders against any potential risk of default, it provides mortgage insurance, which underwrites any financial loss arising out of the deal due to the loan default.

As mortgage insurance offers security to lenders, they are happy to offer you loans even if you can afford to pay only 5% of the purchase price upfront. This allows both lender and borrower to find a common ground and do business without any financial obstacle or risk.

However, like the standard practice for all insurance, this also requires you to pay a premium to cover the insurance cost. These premiums that buyers pay to get mortgage loans with an upfront payment of less than 20% are known as CMHC fees. It ranges from 2.4% to 4.5% of the purchase price depending on how much down payment you pay.

               Down Payment % CMHC Fees % of Total Transaction
                 20% (Optional) 2.40%
                 15% to 19.9% 2.80%
                 10% to 14.9% 3.10%
                   5% to 9.9% 4.00%
Non-Traditional Down Payment  5% to 9.9% 4.50%

The CMHC permits homebuyers to pay the premium in one lump sum or through monthly payments. If you select the second option, you have to pay the premium added to your mortgage repayment for the entire duration of debt servicing.

How To Calculate CMHC Fees?

The CMHC calculates its fees based on:

  • The total value of the mortgage credit.
  • The amount down payment you are able to pay.

The higher your down payment is, the lower is your premium. When the risk is higher, which is common with a 5% down payment, you have to pay more CMHC fees. At a 15% upfront down payment, it reduces considerably. If you can afford a 20% down payment, you can avoid CMHC fees, as buying mortgage insurance is optional.

Let’s see how CMHC fees are calculated when you bought a $500,000 home.

Percentage of Down Payment 5% 10% 15% 20%
Amount of Down payment $25,000 $50,000 $75,000 $100,000
Amortization 25 years 25 years 25 years 25 years
Mortgagee Premium 4.00% 3.10% 2.80% Optional
Mortgagee Premium Amount $19,000 $13,950 $11,900 $0

How To Avoid CMHC Fees?

A $500,000 home at 2.5% interest rate and 5% down payment, you have to pay $19,000 in CMHC fees. It is almost 76% of your down payment and an additional 9-month mortgage repayment considering nearly $2,200 monthly repayment for the same loan. This looks huge at the end of the amortization though it won’t impact too much when paid every month.

Is there a way to avoid CMHC fees? Yes, you can minimize and even avoid paying the insurance premium. How? Here are a few tips.

  • Increase The Down Payment

Anyone buying a house with a down payment of less than 20% has to pay CMHC fees. You can save more to pay the down payment of 20% and get rid of it. It looks daunting to save over the years and pay that much down payment that runs to be $100,000 for a home valued at $500,000. Here you can pull together money from different sources, such as

  • Chequing and savings accounts
  • Registered Retirement Savings Plan (RRSP)
  • Tax-free savings account created for investments
  • Mutual funds, stock bonds
  • Selling of assets
  • Gifts from immediate family members
  • Secondary Financing and Loans

You need to increase your down payment to 20% to avoid CMHC fees. Secondary financing and loans present a good option. You may have personal loans or loans on your credit card to make your down payment as much as possible and cross the 20% thresh hold to void CMHC fees. However, factored the total cost and check with your lender if it allows secondary financing.

  • Go for Private Lenders

Between 1% and 2% of all Canadian mortgage lending belongs to private lenders. They don’t require you to buy mortgage insurance and pay CMHC fees. However, such a line of credit has its own merits and demerits. The interest rate will be much higher. You need to evaluate it carefully before applying to a private lender.

  • Look for Alternative Mortgage Insurance

You may buy mortgage insurance from Genworth and Canada Guaranty to avoid CMHC fees. Being private insurers, these are more flexible to offer customized solutions. Also, they don’t push for higher insurance premiums in case of down payment money collected from non-traditional sources, which the CMHC does. While the CMHC is going to enforce stringent provisions, including higher credit score and lower debt to income ratio, starting from July 1, 2020, Genworth has already assured of not following the same.

Are you still in doubt if it is right to avoid CMHC fees? It entails costs as well as benefits. If you want a home quickly or afford to pay the premium, you can go for it. But if a little effort can save you from paying an additional 50% to 70% of your down payment, it is worth the effort.

Get in touch with me to explore your options and know what is best considering your specific condition.