If you’re thinking about buying a home in Canada, one of the most important things to understand is the difference between insured and uninsured mortgages. Below is what you need to know about CMHC insurance.
What is CMHC insurance and why do you need it:
CMHC insurance is a type of mortgage default insurance that protects lenders in the event that a borrower defaults on their mortgage. It’s required on all mortgages with a down payment of less than 20%, and it’s offered by the Canada Mortgage and Housing Corporation (CMHC).
How does CMHC insurance work:
If a borrower defaults on their mortgage, the lender will be reimbursed by CMHC for a portion of the outstanding loan balance. The amount that CMHC will cover depends on the size of the down payment:
For a 5% down payment, CMHC will cover up to 95% of the outstanding loan balance
For a 10% down payment, CMHC will cover up to 90% of the outstanding loan balance
For a 15% down payment, CMHC will cover up to 85% of the outstanding loan balance
What are the benefits of CMHC insurance:
CMHC insurance provides a level of security for lenders, which in turn makes it easier for borrowers to qualify for a mortgage. Without CMHC insurance, lenders would likely require a larger down payment, a higher credit score, or both which could negatively affect your buying power.
How to get CMHC insurance for your mortgage:
If you’re applying for a mortgage with a down payment of less than 20%, your lender will automatically include CMHC insurance in your loan. You won’t need to apply for it separately.
What are the differences between insured and uninsured mortgages in Canada:
The biggest difference between insured and uninsured mortgages is the down payment requirement. For an insured mortgage, the minimum down payment is 5%. For an uninsured mortgage, the minimum down payment is 20%.
Other differences include:
- Mortgage insurance premiums: With an insured mortgage, you’ll be required to pay mortgage insurance premiums (MIPs). MIPs are a type of insurance that protects the lender in the event that you default on your mortgage. With an uninsured mortgage, you won’t be required to pay MIPs.
- Interest rates: Insured mortgages typically have higher interest rates than uninsured mortgages. This is because the lender’s risk is higher with an insured mortgage (due to the CMHC insurance).
- Qualifying criteria: There may be differences in the qualifying criteria for insured and uninsured mortgages. For example, some lenders may require a higher credit score for an uninsured mortgage.
Which type of mortgage is right for you:
The type of mortgage that’s right for you depends on your personal circumstances. If you have a down payment of less than 20%, an insured mortgage may be the best option. If you have a down payment of 20% or more, an uninsured mortgage may be the best option.
Understanding the difference between insured and uninsured mortgages is important if you’re planning on buying a home in Canada. Be sure to speak with a qualified mortgage professional to determine which type of mortgage is right for you. You can visit CMHC’s website HERE to learn more.
Are you thinking about buying or selling and have questions about the current market? Contact me any time with your questions as I’m always happy to help.