# CMHC insurance question



## balexis (Apr 4, 2009)

Hi all,
Pretend I purchase a house with 5% down. The CMHC premium gets added to my mortgage.

If I sell the place 1 year later and go back to renting, do I get some sort of refund on the premium, or is it a sunk cost?

Instead of renting, what if I simply want to buy more house in a way that again I only have 5% cashdown, do I have to pay for another entire CHMC premium, or is the insurance portable? To what conditions?


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## kcowan (Jul 1, 2010)

balexis said:


> Hi all,
> Pretend I purchase a house with 5% down. The CMHC premium gets added to my mortgage.
> 
> If I sell the place 1 year later and go back to renting, do I get some sort of refund on the premium, or is it a sunk cost?
> ...


No the insurance fee is applied to the purchase transaction and is only associated with that property. It is not portable nor refundable. The only way you can win is to defer moving until you have more than 20% down to apply to the next place.


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## balexis (Apr 4, 2009)

That's what I feared.

Seems a ripoff as the insurance is supposed to cover the entire mortgage term.

Anywho, as you say, the best is to come up with 20% and save this premium altogether.


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## the-royal-mail (Dec 11, 2009)

That's what I plan to do: calmly continue renting until such time as I have saved the 20% DP in addition to all the other costs of buying, moving etc. I will re-evaluate the market etc at that time and objectively make a determination if buying a house is still the right thing to do. If not, the cash will be redeployed elsewhere at that time. The point is to save the money prior to spending it.


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## Cal (Jun 17, 2009)

balexis said:


> Seems a ripoff as the insurance is supposed to cover the entire mortgage term.QUOTE]
> 
> And it does. If you chose to sell after one year, it is you who broke the agreement, not CMHC.
> 
> As you mentioned, much better to save up for a larger dp. But it really would add to another level of frustration, if one were to lose their job or be relocated, and be forced to sell.


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## doctrine (Sep 30, 2011)

Total ripoff. Not only does it add 3% to your purchase price, but you have to borrow it and thus you pay interest on it for 5 years.

In fact, if you're close but under to the 20%, it's highly recommended you take out a loan to make up the difference.


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## rookie (Mar 19, 2010)

most importantly, do not forget that your insuring the liability of the balance 15% that the bank is lending you, not the 5% that you put down. so if the property value goes to 0 (wonder how it could be...), you loose the 5%, the bank looses the 80% it lent you but gets 15% from CMHC.


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## Four Pillars (Apr 5, 2009)

doctrine said:


> Total ripoff. Not only does it add 3% to your purchase price, but you have to borrow it and thus you pay interest on it for 5 years.


Not really. Without CMHC you probably wouldn't be able to buy a house as easily as with it. Higher downpayments and/or higher interest rates would result for a lot of buyers.



doctrine said:


> In fact, if you're close but under to the 20%, it's highly recommended you take out a loan to make up the difference.


Excellent advice. Where were you 12 years ago when I bought my first house? I should have done this.


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## balexis (Apr 4, 2009)

rookie said:


> most importantly, do not forget that your insuring the liability of the balance 15% that the bank is lending you, not the 5% that you put down. so if the property value goes to 0 (wonder how it could be...), you loose the 5%, the bank looses the 80% it lent you but gets 15% from CMHC.


Are you sure? So, for a 100 000$ house with 5 000$ DP, I would pay 100 000$ * 0.0275 = 2750$ + tx in CMHC premium to insure only 15 000$ of the debt?


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## jamesbe (May 8, 2010)

But you have to be careful, if you are close to your Debt service ratio you may no longer qualify for the mortgage!


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## balexis (Apr 4, 2009)

It seems the CHMC is, in fact, transferable, under certain conditions.

http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/upload/CMHC-Portability.pdf


> Allows borrowers to port the CMHC Mortgage Loan Insurance from an existing home to a new home and in some cases save money by reducing or eliminating the premium on the financing of the new home.


If I understand the chart correctly (Bottom of page 2 of the document) , your previous premium can be credited up to 100% to your new purchase if you buy within 6 months, down to 0% if you exceed 24 months.


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## albertGQ (Jun 11, 2011)

rookie said:


> most importantly, do not forget that your insuring the liability of the balance 15% that the bank is lending you, not the 5% that you put down. so if the property value goes to 0 (wonder how it could be...), you loose the 5%, the bank looses the 80% it lent you but gets 15% from CMHC.



CMHC insures the entire amount.
There's plenty of mortgages under 80% that is insured. With your logic, the client is paying the insurance premiums for nothing.


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## Saniokca (Sep 5, 2009)

albertGQ said:


> CMHC insures the entire amount.
> There's plenty of mortgages under 80% that is insured. With your logic, the client is paying the insurance premiums for nothing.


Yeah I was under the impression that the whole thing gets insured... 

I also agree that it's a ripoff - of taxpayers though! I feel ripped off that banks make the money while I bear the risk.

CMHC is a sham and should not exist.


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## rookie (Mar 19, 2010)

ok people. please smarten up and do some DD. i pray you guys not to fall for generally conceived notions.

following is the excerpt from website 
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.

To obtain mortgage loan insurance, lenders pay an insurance premium. Typically, your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.

now tell me where have they mentioned anything about the borrower. its only the lender that is protected. since when do you guys think did the big guys start thinking about simple folks like us?


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## rookie (Mar 19, 2010)

the only place where i could be wrong is that the CMHC insures the entire amount of the mortgage, but note that the beneficiary is the lender.


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## balexis (Apr 4, 2009)

rookie: Who ever said anything about the beneficiary being the defaulting borrower and not the lender? Of course the beneficiary is the lender! Either the borrower insures its mortgage or it will pay a higher interest rate. It's all about risk and it's fine that way that risky borrowers pay more in the end.


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## HaroldCrump (Jun 10, 2009)

CMHC insures the lender against a specific borrower, therefore, there is no refund.
I don't see how this is a rip off for the borrower.
As others have said, it may actually be a rip off from the tax payer's perspective.
The tax payer gets to bear all the risk.
And in return they get a housing bubble and raging inflation in other sectors of the economy.

I agree with Saniocka above that this sham should be dismantled.
And while we are at it, get rid of the HBP as well.


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## balexis (Apr 4, 2009)

> CMHC insures the lender against a specific borrower, therefore, there is no refund.


The specific part where I think it is a rip off is regarding the duration of the insurance. The insurance insures the lender for the entire amortization period. Why would a customer A pay the same premium to insure his mortgage during 25years+, compared to a customer B who breaks its mortage after, say, one year? The risk of defaulting is higher for Customer A since the period of insurance is longer.

That's where it does not make sense for me.

Why do you think the tax payers are at risk exactly? Do you believe the CHMC actuaries made a mistake and are charging a premium that is too small, leading to an insufficient reserve fund? What about the private company Genworth, who charges the same premiums for mortgage insurances as the CHMC? Do you think they are ripping off their shareholders as you think the CMHC is ripping off tax payers?


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## HaroldCrump (Jun 10, 2009)

balexis said:


> The specific part where I think it is a rip off is regarding the duration of the insurance. The insurance insures the lender for the entire amortization period. Why would a customer A pay the same premium to insure his mortgage during 25years+, compared to a customer B who breaks its mortage after, say, one year? The risk of defaulting is higher for Customer A since the period of insurance is longer.
> 
> That's where it does not make sense for me.


You are answering your own question, I think : _the insurance is for the duration of the loan_.
Whether the borrower chooses to let it run the full 25 years or terminate the loan after 1 yr. is immaterial.
If the same property is sold to another borrower, new insurance premium would apply.

On the other hand, I think that if the original borrower purchases another property and finances with the same lender, I believe the CMHC premium is portable.
If that is correct, then it's all free and fair in my mind.

For someone that complains that they have to pay CMHC premium every time they terminate the loan, there are two simple solutions : 
_stop buying so many damn houses every 2 years_ OR _just save 20% down-payment_. 
Problem solved.



> Why do you think the tax payers are at risk exactly? Do you believe the CHMC actuaries made a mistake and are charging a premium that is too small, leading to an insufficient reserve fund? What about the private company Genworth, who charges the same premiums for mortgage insurances as the CHMC? Do you think they are ripping off their shareholders as you think the CMHC is ripping off tax payers?


Genworth insured mortgages are also guaranteed by the govt. from what I recall.
Not 100% as in the case of CMHC, but something like 80% or 90% is guaranteed.

My position is that a housing loan should be like any other loan.
A home-owner either needs to pay the minimum down payment that the market (i.e. pool of lenders) require to issue a mortgage OR pay the true loan insurance premium.
Without any govt. guarantees whatsoever.
At that point, the interest rate on the mortgage would be the real market interest rate that reflects the true risk to the lender.

Ever noticed the loan insurance premiums for car loans?
I want the tax payer to guarantee my car loan too.
And, my don't-pay-until 2020 loan for a flat screen LCD TV and the surround sound home theatre system, too.


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## Potato (Apr 3, 2009)

balexis said:


> Why would a customer A pay the same premium to insure his mortgage during 25years+, compared to a customer B who breaks its mortage after, say, one year? The risk of defaulting is higher for Customer A since the period of insurance is longer.



To me, Customer B should pay more. The fact that they sold and required insurance a second time gives us information about B's behaviour: they are either not planning ahead (flipping quickly before they build any equity), or not saving despite the forced savings of the first mortgage. When B comes around for a second (or third or fourth) round of mortgage insurance, that would tell me that B is then a higher default risk and should be charged more.




> Why do you think the tax payers are at risk exactly? Do you believe the CHMC actuaries made a mistake and are charging a premium that is too small, leading to an insufficient reserve fund?



Unfortunately the CMHC is not terribly free with its data so it's tough to say for sure, but I would strongly lean towards the answer being that yes, they aren't charging enough. They're charging the same rates for condos purchased at 300X rent as they were for houses at 150X rent several years ago (or today in less-lofty centres). They charge the same for someone with stellar credit as they do for someone just above the cut-off, who would be considered a sub-prime borrower in the US. It's a completely nonsensical pricing system. Either they were egregiously over-charging Canadians 6 or 7 years ago, or they are under-pricing risk today. As to whether the actuaries made a mistake: given that the pricing chart looks to be political ("so fairsies!") I'd be surprised if they had actuaries at all.


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## MrMatt (Dec 21, 2011)

The insurance isn't for the loan value.
It's for the difference between the loan value and the value they sell the house for after they foreclose on you for not paying.

Right away, the difference they're insuring is huge. After 1 year there has been hopefully some increase in the home value and some principal repayment, the amount that CMHC would pay out is less, and becomes dramatically less over time.

The reason you don't need CMHC if you have 20% down is because there is a pretty small risk of the lender not covering most of the loan with the post foreclosure sale of your house.


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