The CMHC premium is the insurance fee charged by the Canada Mortgage and Housing Corporation (CMHC) when a homebuyer makes a down payment of less than 20% of the purchase price. It protects the lender in case the borrower defaults on the mortgage.
How It Works
When buyers cannot provide a 20% down payment, mortgage default insurance is required by law in Canada. The CMHC premium is added to the mortgage balance or can be paid upfront. This insurance reduces risk for lenders, allowing them to approve mortgages with smaller down payments.
Cost of the Premium
The premium is calculated as a percentage of the mortgage amount, based on the size of the down payment. Smaller down payments lead to higher premiums. For example, with a 5% down payment, the premium might be around 4% of the loan amount, while a 15% down payment could reduce it to around 2%.
Why It Matters
The CMHC premium enables more Canadians to buy homes without saving for a large down payment. While it adds to the overall cost of the mortgage, it makes homeownership accessible to first-time buyers who might otherwise be unable to purchase a property.
Final Thoughts
Although the CMHC premium increases the total cost of borrowing, it provides security to lenders and opportunity to buyers. Understanding its impact helps borrowers plan better for the true cost of their mortgage.