CMHC's mortgage loan insurance explained

Mortgage loan insurance has become a popular way for people to buy a home when they can't come up with a 20 per cent down payment.

"I would say that 95 per cent of all first-time homebuyers require the insurance," said Calgary REALTOR® Crystal Tost. "It's expensive in Calgary. How do you save 20 per cent to get around insurance when you're paying rents and car payments, and probably have credit cards? It's definitely a good program for people that want to get into a home."

Cathy Aquilina, manager of client relations for Canada Mortgage and Housing Corp. (CMHC), says mortgage loan insurance protects the lender in case the borrower can't make payments.

"If anyone wants to buy a home and they have less than a 20 per cent down payment, they need to have mortgage loan insurance," she said.

CMHC mortgage loan insurance lets a homebuyer get a mortgage for up to 95 per cent of the purchase price of a home. It also ensures people get a reasonable interest rate, even with a smaller down payment.

"Because we are backing up the lender, so we're basically taking on that risk for the lender, they get to have the same great interest rates (as the people with larger down payments)," said Aquilina.

"Mortgage loan insurance helps stabilize the housing market, because during all the different economic slumps that have been happening, down payments may be harder to save for." - Cathy Aquilina, Canada Mortgage and Housing Corp.

Aquilina says the higher the down payment on a house, the lower the premium to get mortgage loan insurance.

"Unlike car insurance where it's monthly, it's a one-time fee," she said, adding that the amount can be added to a mortgage or it can be paid upfront. "I can tell you that 99 per cent of people add it on to their mortgage."

She gives an example of how it would work for a $400,000 home. For any home costing less than $500,000, a homebuyer can choose to put as low as five per cent down. On that $400,000, a five per cent down payment would be $20,000. The premium would be four per cent of the mortgage amount of $380,000, which would equal $15,200. That premium can then be added to the mortgage, bringing it to $395,200.

If the home costs more than $500,000, you'll need a minimum of five per cent down on the first $500,000 and 10 per cent on the remainder. If the home costs $1,000,000 or more, mortgage loan insurance is not available.

"Mortgage loan insurance helps stabilize the housing market, because during all the different economic slumps that have been happening, down payments may be harder to save for," said Aquilina.

"It ensures that there's availability of mortgage funding. We're taking on that risk for the lender. If anything is to happen, and they can no longer pay their mortgage, we step in. We don't want them to ever have to leave their home, so we'll try to work with them, but, ultimately, we do protect the lender."