Our First Home: Mortgage types and CMHC insurance

Our First Home: Mortgage types and CMHC insurance

What’s a mortgage?

A mortgage is a specific type of loan that allows prospective homeowners the opportunity to afford the homes they wish to purchase. You pay back a mortgage over a period of many years. This period of time is called an amortization period.

What kinds of mortgages can I access?

Fixed Rate Mortgages

Most first-time buyers in the market select a fixed-rate mortgage. This type of mortgage has interest rates set to a particular percentage during the lifetime of the loan.

 

Why are 5-year fixed rates so popular?

Fixed-rate mortgages are popular because interest rates remain the same in that five-year period.

 

5-year periods are a great choice for the new buyer since the time-frame is short. Buyers are protected from financial stress in case bank rates increase in the future.

 

I’ve heard of variable rate mortgages before. What are they?

Variable rate mortgages have interest rates that increase or decrease with the bank rate. This type of mortgage benefits consumers who can manage mortgage payments according to changes that affect the bank’s own prime interest rates. If you prefer this option, it is also open to you.

 

Thinking about what kind of mortgage plan you would like to have is important before making a down payment.

Down Payment Basics

What’s a down payment?

A down payment is a percentage of money you have to pay upfront in order to buy a home. It is usually much smaller than your actual mortgage and depends of the selling price of the home you want to buy.

 

In Canada, the following rules apply to anyone making a down payment on any type of residential property, whether rented or lived-in:

 

  • Homes valued less than $500,000, the down payment amount must be 5%
  • Valued above $500,000, a 5% down payment is required on the first $500,000 and a 10% payment on the second $500,000 to $1 million
  • Homes valued more than $1 million, a 20% minimum down payment is required

Source: CMHC

 

My realtor says that I need to purchase CMHC insurance. What’s that?

CMHC insurance is a type of mortgage default insurance provided by the Government of Canada. It protects your lender (a bank or credit union) from financial liability in case you default (cannot make payments) on your mortgage.

 

You pay for CMHC insurance based on a premium rate. How much you pay will depend on the value of your down payment amount.

 

How do I know if I need CMHC insurance?

To find out if you’ll need CMHC insurance, your lender divides the amount of your down payment by your pre-approved mortgage. This number, called a loan-to-value ratio, determines whether or not you’ll need CMHC insurance.

 

If you’re buying a home with less than a 20% down payment, you must have a premium in order to purchase your home.

 

What are current CMHC premium rates?

The most recent CMHC premiums are:

 

  • 3.85% for down payments between 5–9.99%
  • 2.40% for down payments between 10–14.99%
  • 1.80% for down payments between 15–24.99%

My down payment is worth more than 20% and/or my home is worth more than $1 million dollars. Do I have to get insurance?

If your down payment is worth more than 20% of your mortgage, or your home’s purchase value is more than $1 million, then you don’t have to get mortgage default insurance.

 

If I don’t qualify for CMHC rates, is there another way I can get mortgage default insurance?

Yes, in fact, there are two private groups that provide mortgage default insurance within Canada. They are Genworth Financial and Canada Guaranty. 

 

Check out our Mortgage Insurance Calculator!

 

Insurance Calculator

A Maryland native and Toronto-area transplant/graduate of the University of Toronto, Christine is a content writer at Loanerr. When not writing articles, she's an avid swimmer, cat lover, violinist in a indie band, and a humble food aficionada.