Determine how your down payment will impact the amount of CMHC insurance that is added to your mortgage.
CMHC stands for the Canadian Mortgage and Housing Corporation. It is Canada's national housing agency and has the mandate to help Canadians access affordable housing options. One of the primary activities of the CMHC is to provide mortgage insurance to home buyers.
One of the primary things the CMHC does for home buyers is to provide mortgage loan insurance. The CMHC provides enough insurance so that home owners can get a mortgage for up to 95% of the purchase price of a home. In addition, the CMHC helps ensure that the home buyer gets a reasonable interest rate despite the fact that the down payment is smaller. Finally, mortgage loan insurance helps to stabilize the housing market.
Mortgage insurance, which protects lenders from the risk of borrowers defaulting on their payments, is mandatory in Canada for loans with a down payment of less than 20 per cent. If you put down a minimum of 20% of the purchase price of the property you can avoid paying for CMHC mortgage insurance, but of course you also do not get the benefit of the protection it provides. It's also possible to avoid CMHC insurance in the situation where you are refinancing your home, but in this situation you must leave at least 20% in the home i.e. do not mortgage more than 20% of the value of the home.
Typically CMHC turnaround is anywhere from 2 to 5 business days. However, if your file is complex or there are other issues, it is possible it could take longer.
As of 1 July 2020, the CMHC instituted new rules which will effectively reduce the purchasing power of home buyers who opt for CMHC insurance. For example, the CMHC will no longer allow home buyers to use borrowed funds for their down payment. Additionally, they will require a higher credit score from at least one borrower. Finally, they have lowered the threshold for how much debt applicants can carry compared to the income.
The CMHC is now requiring a credit score of 680 versus the previous amount of 600. In terms of the debt load, lenders use two key metrics:
CMHC lowered the GDS from 39 percent to 35 percent and the maximum TDS from 44 percent to 42 percent.
Private mortgage insurers are not required to comply with CMHC rules. However, to compensate for the lender's risk, one can expect to pay higher mortgage interest rates via this avenue.
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