Is there a possibility to avoid CMHC fees?

If the thought of paying for a loan seems painful to you – there are some ways to lower the amount you have to pay for mortgage insurance.

What usually comes to mind when we think of taking out a credit? Of course, we think of several things – the borrowing rate, the amount of the initial contribution, the required service charges. Another thought that crosses our minds is about required contributions for insurance. Since the thought of paying off the credit for life seems unappealing, most people tend to investigate how they can reduce the additional costs or avoid CMHC fees.

Who is the provider of insurance for the taken money?

It’s common knowledge that if your initial deposit is less than 20% of the initial cost, you’ll have to pay for insurance – lenders want to cover themselves in case of default. There are three official institutions in Canada that are in charge of providing insurance services – Canada Guaranty, Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial.

In fact, you will most likely not have the option to choose between the above-mentioned providers. Since insurance serves as protection for money lenders who are very reluctant to take risks, it is up to them to decide which one to choose. However, the insurance does not just serve as a guarantee for the money lenders – the benefit for the borrowers is that if they had a low initial contribution, they would not have received a positive decision on their mortgage application in the first place without any guarantees from insurance institutions. It’s a win-win solution for both sides.

How much would it cost?

The amount the insurance will cost you depends on the amount of the initial contribution paid. Generally, the cost ranges from 2.8% to 4% of the total loan amount. The cost of insurance is added to the total loan amount and included in your regular monthly payments.

If your initial contribution is low (from 5% to 9.99%), the percentage on your insurance would also be high – 4%. If your deposit is in the mid-range (from 10% to 14.99%), you will spend an additional 3.10% of the total amount on the money guarantee. Finally, if you saved a lot for your initial deposit (between 15% and 19.99%), you would pay an additional 2.80% for insurance.

For example, you intend to make an 18% initial contribution to purchase an $800,000 residence. In this case, you would take out credit for $656,000. Since you are in the 15% – 19.99% category, you would be charged 2.80% of the total loan cost for mortgage default insurance. The amount you would have to pay for the insurance would be $18 368. Since this amount would be added to your principal mortgage, the final amount of your mortgage would be $674 368.

The great advantage is that you don’t need to pay the total price for the insurance in one moment. The price is added to the amount of your principal mortgage and included in regular monthly payments.

How to avoid CMHC fees?

One of the easiest ways to avoid paying insurance fees is to make a down payment of 20% of the purchase price.

The other option is to take out a mortgage and leave no less than 20% in your residence.

Third, insurance payments are usually higher for people who have taken out the mortgage for a long time—the shorter the term, the cheaper the insurance.

There is also a “portability option” in some mortgage packages that allows you to lower the cost of insurance if you move to another home. If you buy another home, you can lower or even eliminate the first home’s insurance fees.

A couple of final thoughts

Even though the thought of paying more sounds painful, the availability of mortgage insurance can give you some advantages. First, you could get approved for a mortgage with a low initial down payment. Second, it can help you lower the loan rate because certain policies cover the lender. And remember, the more you pay for an initial down payment, the less you would spend on mortgage default insurance. 

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