What does CMHC insured actually mean?
Posted on Sep 10, 2012 in Mortgage Market Updates and News
When you got your mortgage, did your broker or bank tell you it had to be 'CMHC insured' while you just smiled and nodded, not actually knowing what that really meant? Or worse, did you assume when they said insured, it meant your mortgage was life insured, and would be paid off if something were to happen to you? Well, today I'm writing about what CMHC insured actually means, and when you'll come accross it.
CMHC (or Genworth or Canada Guarantee), are the mortgage DEFAULT insurers in Canada currently. A mortgage must be insured by one of these 3 (legally), if the amount of the mortgage, is more than 80% of the value of the home. So if you're purchasing with less than 20% down, then you have no option, your mortgage must be 'CMHC insured`.
Yes, there is a cost to this insurance, premiums range from 1.5% of the total value of your mortgage up to 4.5%, which can be a huge cost depending on the size of your loan. CMHC insurance is typically included in your mortgage, so it`s not a cost you actually pay upfront, but it is amortized over the life of your mortgage.
So, what does CMHC insurance do for you? Well, unfortunately many people would answer this by saying... nothing. When people say CMHC does nothing for you, they're referring to the fact that it's DEFAULT insurance, not life insurance. So in the case that you default on your mortgage (stop paying it, and have your home potentially foreclosed), the loss, will be covered. BUT, here's where many people get confused, the loss is covered yes, but not to you, CMHC insurance covers any loss incurred by the lender if you default. So the lender will be paid back, but that doesn't mean you're free to default without consequenses. You're not covered. CMHC will likely still come after you, and the default will still go against you. But the lender is covered. You're paying to have less risk to the lender.
So why would I disagree with the people saying CMHC does nothing for you? Well, I see CMHC not as something that protects us, but as giving us a priveledge. If CMHC insurance wasn't around, we'd all be waiting until we could save up 20% down payments, to purchase homes. Think about how long it took you, especially first time home buyers, to save that 5% down payment, 20% is simply out of reach for many people. So although CMHC is a large cost, it saves us the time, and money we'll spend along the way renting, of waiting until we save 20% to purchase a home. Thus enabling more people to get into the housing market, and helping keep the market strong with many buyers.
Some misconceptions I've heard about CMHC:
-It's life insurance: If my mortgage is CMHC insured, and I pass away, my mortgage will be paid off. CMHC is not life insurance, it's default insurance. So it is important to still look into getting your mortgage insured in some way, whether that be through mortgage life insurance, or a term or permanent product.
-It's house insurance: I don't need home insurance because my mortgage is CMHC insured. CMHC is not home insurance and doesn't protect your house or it's contents. It's important to still insure your home and contents againts fire, theft, etc.
I hope this has clarified CMHC insurance for people. For more information on CMHC insurance, read my earlier post http://portalbernimortgage.com/blog_article.php?pid=709
-Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc.