Mortgage Default Insurance: What is it and why do I have to pay for It?
Mortgage Default Insurance, or CMHC insurance as most people know it, is the reason why it is possible to buy a home with less than 20% down. A few years ago, a buyer had to have at least 25% down to avoid the default insurance premiums. To be clear, this is NOT the optional life insurance that is offered to you when you get a mortgage.
I have never agreed that borrowers should pay for this cost. It is an insurance policy with the lender as the beneficiary. But, as with anything, no matter where we "see" the cost, consumers end up paying for it one way or another. If lenders covered the cost, interest rates would be higher.
So, what is it CMHC Insurance?
When a lender lends money, they take on risk that the borrower doesn't repay the loan. CMHC (or Canada Guaranty, or Genworth), will issue an insurance policy, paid for by the borrower, that protects the lender in the event of default. Without that protection, lenders would still require massive down payments, which would generally make home ownership little more than a dream for most borrowers.
But are we paying too much, and couldn't we pay monthly instead of adding thousands to our mortgages (and then paying interest on that money)?
Interestingly, a former Vice President at insurer Canada Guaranty, Brian Bell, argues exactly that in a recent Financial Post article.
Our Mortgages 101
page includes a section on this topic and includes a table of the premiums, but as a rough example a borrower should expect to pay up to 2.75% of the loan amount if the down payment is 5%. On a $300,000 home, that's $7837.50! Thankfully, this amount is added to the balance of the loan, not collected up front. And if you have a 20% down payment, this cost can (usually) be avoided altogether.
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