Does CMHC Insurance Protect You?
Posted on Jul 31, 2012 in Mortgage Market Updates and News
I'd like to take a moment to clarify something that, as a mortgage professional, I find many people are confused about.
What is CMHC Insurance, why do I need it, and what does it do for me?
I find many of my clients, especially first time home buyers, are very confused on this topic. People hear insurance, and think automatically, it protects me. The most common things I hear people say are:
-I don't need life insurance as my mortgage is insured with CMHC
-My mortgage is insured with CMHC so if I can't pay the mortgage for some reason, CMHC will take over
Well unfortunately this is not the case. CMHC (or could be Genworth or Canada Guarantee, but the common one people hear about is CMHC), is default insurance. But it doesn't protect you if you default, it protects the lenders. Now you might be thinking, well that sounds like a rip off.. but really.. CMHC insurance is in place to help us buy homes. Let me explain further..
The majority of first time home buyers entering the mortgage market today, are purchasing with 5% down payments. That's all the average person can come up with, and even that can be a struggle. While there are technically no more zero down mortgages in Canada, 5% down payment is needed. CMHC is mandatory insurance for anyone purchasing with less than 20% down payment. How long would it take you to save up or gain access to a 20% down payment?! Likely years, if ever. Realistically, 20% is simply out of reach for most people. But that being said, for banks or monoline lenders to lend to people who've only saved 5%, and quite often, have no other collateral or assurances, is risky. People say we have strict mortgage lending rules in Canada, and I can't disagree, but they'd certainly be a lot stricter, if CMHC wasn't around.
So what does CMHC do? If you have a high ratio mortgage (less than 20% down), and you default and the home is foreclosed, CMHC will reimburse the lender any losses. So it takes the risk away for the lender. Which in turns, makes them more willing to lend to you having only 5% down. Or maybe overlook other weaknesses in your file.
Without CMHC, lenders would either not do high ratio mortgages and make all buyers wait until they save 20%, or they'd be incredibly strict with rules when lending to people with less than 20% down, because they'd lose money if the borrower defaulted.
So what does this all mean? Yes CMHC, Genworth and Canada Guarantee Default insurance is a cost, sometimes a very large one, but it allows you the priveledge of purchasing with a small down payment. It is mandatory, so there's no negotiating or getting out of the cost. It is included in your mortgage, so it's not an upfront cost. It is not life, critical illness, or disability insurance, but default insurance for the lender. When getting a mortgage, you should still look at your other insurance options, whether that be mortgage insurance, term, or permanent life insurance. Discuss options with your mortgage professional who'll be able to refer you to a licensed insurance broker. Insurance is a whole other topic:)
Any questions please feel free to call or email firstname.lastname@example.org 2507300239. Sharie Marie Francoeur Mortgage Professional with TMG The Mortgage Group Canada Inc, Port Alberni, Parksville, Qualicum, Nanaimo, BC