CMHC is one of 3 mortgage default insurance companies and is owned by the government of Canada. The other 2 companies that provide mortgage default insurance are Sagen-Genworth and Canada Guaranty.
CMHC insurance provides mortgage lenders with mortgage default insurance allowing them to fund a mortgage with as little as 5% down payment.
Without this insurance protection, the banks would never take on that much risk and you’d need a 20% down payment to purchase a home.
The long and short of it is – If your down payment is less than 20% of the purchase price, you will have to pay a mortgage insurance premium. The CMHC fee that you pay is based on a sliding scale.
Example : If you purchase a home for $500,000 with a down payment of $50,000, from the table above your insurance premium would be 3.1% of amount borrowed. Your CMHC fee would be: $450,000 x .031 = $13,950
The cost of your CMHC fee ($13,950 in the above example) would then be added to your mortgage amount to give you a total mortgage amount of $463,950. Your mortgage payments are now based on a mortgage amount of $463,950.
Being a Real Estate Investor myself, I would choose to pay CMHC fees to only have to pay a 5% down payment every opportunity I have.
Example:
If you purchase a home for $500,000 with a 5% down payment, your down payment is $25,000. You’ll have to pay a CMHC fee of $20,000 since you’d be paying 4% of the purchase price for your CMHC insurance premium as in the table above.
Adding this $20,000 to your mortgage being paid over 25 years will cost you a total of $30,000 over the term with an interest rate of 3.5%. This breaks down to an extra $100 per month on the cost of your mortgage.
Now, you saved $75,000 in down payment by only putting down 5%. If you invested that $75,000 in the S&P 500 using the average return rate of 10.9%, your profit would be worth $921,207 when your mortgage is paid off in 25 years.
Adjusted for inflation your profit would be $475,794.
Note: if you’re not going to invest the money that you saved on the down payment, you may want to go with a 20% down payment to save you the CMHC cost.
