Quick hits on CMHC premiums - first in a series

Given the rising costs of real estate here in the GTA, and consistent demand, it's good to understand your options when purchasing a home with less than 20% down.

This is the first in a series of blog posts that will cover some key aspects of Canada Mortgage and Housing Corporation (CMHC) insurance premiums as you step into your home ownership adventure.

I started my mortgage journey in 1997 after putting 5% down on a two bedroom condo in downtown Toronto. Given the minimal down payment, I learned that the mortgage needed to be insured by CMHC and opted for the insurance premiums to be added to my mortgage payments. All good.

Today, it's a little more complicated.

Let's take Sunil and Brenda, a fictional couple who rent a condo near Yonge and Sheppard, but are looking to buy something bigger as their family expands. They earn a household income of $128,000 and have $34,000 set aside for a down payment on a home. Sunil wants to buy now before the spring as he believes prices will rise quickly. Brenda wants to grow their savings for a bigger down payment while they search for the home that's right for them.

Whether they buy now or in the near future, they will need to factor in mortgage insurance premiums into their financing solution. Some nuances to keep in mind:

CMHC will not insure mortgages on homes that are purchased for $1M or more.

The lower the down payment percentage, the higher the mortgage insurance premium. A downpayment between 5% and 9.99% of the purchase price requires a mortgage premium of 3.6%, for example. But increasing the downpayment to, 10% reduces the overall premium charged to 2.4%. Putting 15% down further reduces the premium to 1.8%. The more you pay down, the less you pay out in mortgage premiums. So if your downpayment is just under 10%, 15%, or 20%, it pays to increase the down payment in order to decrease your overall costs.

In Ontario, you will pay 8% provincial sales tax on your CMHC insurance premiums. This fee must be paid at closing.



Scenario #1 in the above table outlines, in simplified terms, how much mortgage Sunil and Brenda can currently qualify for, without taking into consideration their credit scores or other factors. A mortgage pre-approval will establish how much they are eligible to borrow and will help them step into home ownership with confidence.

Since their potential new home might be purchased for more than $500,000, Sunil and Brenda should also understand that CMHC requires a minimum of 10% down on the portion of the purchase above half a million dollars. As shown in the table, they would be required to put down 5% on the first $500,000 of the purchase price and 10% on the remaining $91,000, bringing the minimum down payment to $34,100 (which is $25,000 plus $9,100).

Scenario #2 shows the financial benefits of a larger down payment. Click here to view CMHC's mortgage insurance premium table.

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Susan Williams is a Mortgage Development Manager with National Bank of Canada.
Email: susan.williams@nbc.ca Twitter: @YMJourney