With an annual GDP of $1.93 trillion, Canada is ranked as one of the wealthiest nations in the world.
There is an abundance of opportunity available to all who call this welcoming country home. The possibilities are endless for the citizens here.
But despite all of this, a new report has suggested that a third of Canadians -- who desire to buy a home -- can't afford to make the purchase.
And that's where CMHC comes in (Canada Mortgage and Housing Corporation). CMHC was established to help Canadians in this particular situation.
But what exactly is CMHC? How can they help you? What are their fees? And also, what are the pros and cons of utilizing the services they offer?
In this post, you will learn all of that and more.
What Is CMHC?
The Canada Mortgage Housing Corporation is a government organization with a blend of business and public program goals. They are explicitly owned by the Crown.
On a lighter note, we can say also that CMHC is the guardian angel or superhero of any Canadians that want to own a house but don't have enough money yet to pay for the 20% down payment.
Launched in 1946, the Canada Mortgage and Housing Corporation is responsible for directing Canada's National Housing Act.
Its directive was to assist with better housing and living environments for Canadians.
Since being founded in 1946, half of all homes constructed in Canada have been aided with the help of Canada's National Housing Act (NHA).
CMHC has assisted countless Canadians with finding homes to meet their needs through loans, grants, etc. Proper housing, as well as the implementation of plans for a healthy community, are supported via CMHC's study and design initiatives.
After the Second World War, CMHC focused its interests on supplying housing for the veterans who were returning home.
As time passed, CMHC continued to expand its operations.
In the 1950s, worries about the quality of housing were included in the assignments of supplying adequate homes.
Metropolitan repair programs to restore the inner city were developed and backed in the 1960s.
And in the 1970s, neighbourhood development initiatives and a residential recovery program promoted nurturing of already existing neighbourhoods.
The main objective of CMHC is to supply housing for impoverished people as well as helping the disabled and the elderly.
Let's Talk CMHC Fees
The premiums for CMHC must be paid upfront and in their entirety, once you begin your mortgage. Generally speaking, insurance rates will cost you 2.8% to 4.0% of the mortgage price.
Without this, mortgage rates would increase as the potential for nonpayment would be higher. Lenders can provide lower rates when mortgages are shielded by CMHC insurance.
How to Assess the Rates of CMHC Insurance
In order to find out your CMHC insurance rate, you have to assess the amount your down payment is as a ratio to your home's purchase value. And then determine what the new mortgage cost will be.
To do that, let's use an example; if your home is valued at $500,000, and you paid $30,000 as a down payment, you'll want to subtract the down payment from the purchase price of your new home.
The new mortgage price will now be a cool $470,000.
Next, you'll want to assess the down payment as a ratio of the home value. Using our example, you'll want to divide the $30,000 down payment into the home's new purchase price of $470,000, which gives you 0.06%.
Then you'll want to calculate your mortgage premium, this is the cost of the mortgage multiplied by your premium percentage.
Going back to our example, with a 0.06% down payment ($30,000) on a $470,000 home price, that will give you a 2.75% premium. You will then multiple the mortgage amount ($470,000) by the 2.75% mortgage premium.
This will bring the amount of your mortgage insurance to $12,925.
How Does the CMHC Mortgage Calculator Work?
Anything less than a 20% down payment of the house's value warrants what is referred to as mortgage insurance.
This insurance shields the lenders or the banks. So in the event that a borrower becomes incapable of making the payments, the lender remains protected against any financial loss.
The cost of the insurance is added on top of your monthly mortgage payment.
However, even though it's already factored in, it's still a wise choice to know how much you're paying.
The CMHC mortgage calculator can help you determine the exact price of the mortgage insurance payment.
You simply enter the purchase price of the home, the amount of your down payment, then add in the time allotted for the mortgage repayment, and it will determine the price of your insurance.
What Is CMHC Insurance and How It Works?
CMHC Mortgage Insurance required for a down payment that is less than 20% of your home's value. But let's dig a little deeper so we can answer the question: How does CMHC work?
Here are some of its benefits as well as how it operates when you apply.
CMHC insurance allows you to gain a mortgage up to 95% of the buying price of a property. For instance, if your new home is valued at $500,000, then you would only need a down payment of $25,000 to qualify.
Furthermore, it allows you to get a decent interest rate, despite having a small down payment.
Also, mortgage insurance balances the housing market. During downturns when it becomes more difficult to save for down payments, it promises the accessibility of mortgage backing.
Baseline Down Payment
In order to receive CMHC insurance, a down payment minimum is required. And that minimum is going to be dependent on the value of the home you intend to buy, for instance:
- A home that is valued at $500,000 or less requires a minimum of a 5% down payment
- A home that is valued at $1,000,000 is not eligible for CMHC
To determine the price, the lender finances an insurance premium on CMHC insurance. It's planned as a ratio of the mortgage and is dependent on the amount of your down payment.
Why Does CMHC Deny Mortgages?
CMHC may sound like it's the perfect solution for your housing woes. And while it is a good option; keep in mind that there are stipulations.
And CMHC can certainly reject applicants if these stipulations are not met. Here are a few reasons as to why rejections may occur:
- Home is located outside of Canada
- Home's value is above $1,000,000
- The down payment came from resources that didn't belong to you
- Your debt load is more than 40% of your gross household income
- The monthly costs of your household are more than 32% of your gross household income
What Happens If CMHC Declines You?
Rejections can and do take place when CMHC's conditions have not been met. So what happens if you've been declined? The answer is straightforward: You don't get a mortgage.
But all is not lost, there are things you can do to get approved next time. Here are a few ideas to help you do that:
Strengthen Your Credit Score
This isn't a magic bullet, however, it's a great way to assure lenders that you're reliable and trustworthy. Focus on building your credit, get a secured credit card, and begin using it to strengthen your credit score.
Pay Off Debt
Rarely is debt a good thing, and it's even worse when trying to apply for a loan. If you get rejected for a CMHC mortgage, one of your first objectives should be to clean up any debt you may have.
Again, this ties back to trustworthiness.
Do you think a lender will feel comfortable and confident lending you money if you have several outstanding debts that have yet to be attended to? Most likely not.
This is a smart move, regardless of whether you're applying for a loan or not. By increasing your income, you'll get out of debt faster and will be able to reapply for your loan sooner.
And in addition to that, increasing your income will also allow you to...
Enlarge Your Down Payment
This is probably the most effective way to get approved. Putting a stronger down payment down will be beneficial for everyone involved.
You'll reduce the amount on your mortgage as well as minimize risk on the end of the lender. So if this is a viable option for you, definitely go for it
What Credit Score Do You Need?
A worthy credit score in order to qualify for CMHC insurance used to be 600. However, with the recent changes that took effect in July of 2020, qualifying now requires a score of 680.
Mortgage Rates in Canada - Is CMHC Competitive?
CMHC falls in the middle of the spectrum in regards to competitiveness. With a general rate of 2.8% to 4.0%, it eclipses some insurance companies like Investors Group but misses the mark when compared to others like Tangerine.
How Much Do I Need to Put Down to Avoid CMHC?
When looking to purchase your new home, it's important to have a sizeable down payment. This will help you to avoid CMHC insurance altogether.
But of course, this is not always a realistic or viable option as extra assistance is sometimes necessary.
With that in mind, you will need a down payment of at least 20% of the purchasing price of your new home if you want to avoid CMHC insurance.
So for example, if your home's purchase price is $400,000, then you will require a down payment of at least $80,000 to forego having to pay for insurance.
How Much Market Share Does CMHC Have?
Beginning last year, the Canada Mortgage and Housing Corporation restricted its insuring practices. At the time; it owned an impressive 49% of new business on the market, it was the biggest supplier of mortgage insurance in the nation.
These tightening restrictions of insurance policies were used in the hope that other companies would follow suit -- which they didn't. As a result, CMHC saw its share of the market take a nosedive.
The initial quarter of 2021 saw CMHC retaining 23% of new insurance policies. This fall from grace is only exasperated by the 44% market share held by Segan and the 33% retained by Canada Guaranty.
Since then, CMHC has acknowledged this blunder and has taken corrective action to rectify the matter.
Although CMHC's lost share doesn't alter the situation in regards to the price of homes, it is certainly a blow to the organization's bearing. And as a result, will affect its capacity to influence the housing market going forward into the future.
What Are People Saying About CHMC?
Generally speaking, most people seemed to really enjoy working with CMHC. Here are a few of the things some people are saying about having worked alongside the Canada Mortgage and Housing Corporation:
Nothing is worse than having a myriad of technical terms and industry jargon thrown at you. But with CMHC, you won't have to worry about being left in the dark when something doesn't make sense.
People have continually made their appreciation known for how CMHC guides them through the process by explaining all the details.
The fact that CMHC takes the time to thoroughly explain all of the nuances to their clients, ensuring that they understand everything is a testament to their desire to truly help.
People have complimented CMHC on their fair rates, comparing them to other banks and praising them for their competitiveness. So this is certainly an area where CMHC has done satisfactorily as well.
Low Employee Satisfaction
As good as CMHC sounds, it's not all perfect. There are reviews of employees being unsatisfied in the workplace, which has been blamed on poor company culture.
Loss of job security in recent times has caused a dip in morale as well as an acute sense of frustration and anxiety among workers.
However, all things considered, CMHC is a great organization that is there to help Canadians find the homes they deserve.
Are You Considering CMHC Insurance?
It can be tough trying to purchase a home, especially if your finances are not at the level they need to be to get the kind of home you want. And if that's the case, there's nothing wrong with assistance.
And that's exactly what CMHC is there to provide you with.
If you still feel like you're in the dark and would like some more guidance, don't hesitate to reach out to us at Insurdinary to get a free quote today.