CMHC Insurance

July 18, 2018

The cost of paying CMHC insurance (or similar private insurance) is very high and one that consumers should be properly advised on and educated about. The CMHC was formed in 1946 with a mandate to help provide housing for returning WWII veterans. Its mandate has subsequently been expanded several times by successive governments.

In 1954 CMHC was empowered to offer mortgage insurance for people purchasing house with less than 25% as a down payment. The idea was to mitigate the risk of the lender, thereby encouraging banks to lend mortgage money to people who could not otherwise to afford to purchase homes. Remember that during the 1950s only about 30% of Canadians owned their homes and most of them owned about 50% of the value as equity.

Then, in 1999, the mandate changed again allowing CMHC to insure house purchases with as little as 5% for a down payment. The rationale for this decision was that real estate values rarely, if ever, seemed to go down so what was purchased today for $100,000 would typically be worth $125,000 in ten years. Accordingly, if the purchaser maintained their mortgage payments for most of that time the value of the property went up and the balance of the mortgage went down again mitigating the risk.

In a practical sense, however, the notion of providing this type of mortgage insurance is merely a scheme by the federal government to guarantee bank’s engaging in high risk lending. The way it works is that the borrower pays a massive up-front premium that might otherwise be available to reduce the amount owing on the mortgage. Often the 5% down is ethereal since it is chewed up on legal and other conveyance fees anyway, so the borrower ends up with 100% mortgage.

Should the borrower default on payments the bank is paid in full, assuming no risk whatsoever, including its legal fees that often run between $15,000 – $20,000 and area also full guaranteed and rarely challenged. The CMHC then sues the borrower for the full amount of the loan include legal fees and other sundry expenses. At bottom there is no insurance available for the borrower who was talked into buying a home by the bank in the first place.

Since the values of properties tend to increase and the cost of borrowing has been very low, for more than the last decade, the monthly cost of purchasing a home remains cheaper than paying rent. Which explains the trend that has lead to about 70% of Canadians becoming home owners, a massive increase since the 1950s. However, those home owners own less of the value of their homes than ever before, perhaps partly due to the increasing premiums of mortgage insurance.

Another consideration with CMHC  insurance (and private mortgage insurance companies) is that some lenders will offer preferred interest rates if the premiums are paid and the insurance purchased. One would have to do the math to quantify the actual savings that a small decrease in interest would make relative to the premium costs.