What is CMHC Insurance?

What is CMHC Mortgage Loan Insurance?

Mortgage loan insurance is required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders if the mortgagee defaults on their payments.  Having mortgage insurance allows a buyer to purchase a home with as little as 5% down while having interest rates comparable to those who have a 20% down payment.

Lenders Fee?

Private lenders and some B Banks do not use CMHC , but rather charge you a “Lenders Fee.”  Essentially, the banks way of charging their own mortgage loan insurance without going through CMHC or Genworth (another insurer). For example, they may charge 1-2% of the purchase price of the home.

How Much Are The Fees For CMHC?

Loan-to-Value
Premium on Total Loan
Up to and including 85% 1.80%
Up to and including 90% 2.40%
Up to and including 95% 3.60%
90.01% to 95% — Non-Traditional Down Payment** 3.85%

 

When/How Do I Pay This?

The CMHC fee will get rolled into your mortgage. For example, a client of mine had purchased a home for $274,000 with a 5% down payment. If you look at the chart above this means her CMHC premium will be 3.6%.

 

Example:

$274,000 – $14,000 = $260,000.

$260,000 x 3.6% = $9360

New Mortgage Amount = $269,360.

This does not effect your down payment amount, however, instead of having $14,000 in equity paid off, you now have $4640 in equity.

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Investing in Rentals

Make Your Money Work

First off, how does one know what the value of a property really is?

Well, that depends on who you are asking. For insurance purposes, brokers want to know the Replacement Cost.

A home appraiser uses a Direct Comparison Approach.  A realtor wants to know the fair Market Value.

I will be focusing on investments and what I have personally used when purchasing my own rental properties.

Investors:

Income Approach

An approach to calculating the value of an income producing property through the usage of the net operating income and capitalization rate typical for that type of property and the area in which it is located

The capitalization rate of an investment may be calculated by dividing the investment’s net operating income (NOI) by the current market value of the property, where NOI is the annual return on the property minus all operating costs. Mortgage payments are NOT included in operating costs. The formula for calculating the capitalization rate can be expressed in the following way:

Capitalization Rate = Net Operating Income / Current Market Value

For example:

A Rental property is selling for $200 000 and the net income is $20 000. Plug the two numbers in the formula $20 000/$200 000 = 10%. If you can find a property between 6-7%, that is typically a good return.

There are THREE ways I’ve personally come across creating income through rental investments

  • Positive Cash Flow – This is where mainly I look at capitalization rate. You have to ask yourself, after covering all my costs every month, is there anything left? If so, it may be a good idea to put extra money in a savings account for unexpected expenses or repairs
  • Paying Down Principal – Although you may not see this money, it is paying down your mortgage and helping you built equity and establish excellent credit!
  • Inflation – Can I make money if I want to sell this house in 5 years? Will the inflation of the property exceed 1.5-2%. I truly believe you make money when you buy a house, not sell. Some would debate this.

 

For any questions regarding your personal investments. Please don’t hesitate to contact me, Ali Fadel at ali.fadel@mtgarc.ca or you can visit my website at www.alifadel.ca

Closing Costs Associated with a New Mortgage

imagesClosing costs for a new mortgage could range anywhere between 1.5% and 3% of the purchase price

Legal Fees – A typical purchase transaction for a $200,000 property with one mortgage will range between $800 to $1,200 including disbursements.

Mortgage Default – Mortgage Default Insurance provides protection for the lender in the case of mortgage default by the borrower. CMHC is the main insurer and ran by the government.

 

Loan-to-Value
Premium on Total Loan Premium on Increase to Loan Amount for Portability and Refinance
Up to and including 65% 0.60% 0.60%
Up to and including 75% 0.75% 2.60%
Up to and including 80% 1.25% 3.15%
Up to and including 85% 1.80% 4.00%*
Up to and including 90% 2.40% 4.90%*
Up to and including 95% 3.60% 5.65%*
90.01% to 95% — Non-Traditional Down Payment** 3.85%

 

Land Transfer Tax (LTT) – If the transaction is a purchase, the buyer must have funds for the land transfer tax. The calculations are based on the following. Note – A refund of land transfer tax, up to a maximum of $2,000, may be available to first time homebuyers

 

Purchase Price of the Property Land Transfer Tax
On the first $55,000 0.5%
On the excess between $55,000 – $250,000 1% of the excess amount
On the excess between $250,000 – $400,000 1.5% of the excess amount
On the excess over $400,000 2% of the excess amount

Home Inspection – Purchase

While prices vary, this cost can be estimated at between $250 and $300

Title Insurance

Title Insurance typically costs between $200 and $300, depending on the type of policy, the property type and the value of the property. Important to have as it may protect you against fraud, encroachments found by a new survey, zoning non-compliance, and easements. There is both lender and borrower title insurance.

Status Certificate Fee – Condominiums only (previously referred to as an Estoppel certificate)

The common fee is $100.

PST on Default Insurance

In Ontario there is still 8% PST (not HST) payable on the premium. For example, a CMHC fee of $10,000 would result in a tax of $800.

HST (formerly the GST)

On a new home, HST is charged; however, the builder may include it in the purchase price

Back to the Basics

Back to the Basics

What do all these mortgage terms meanquestion mark red

Often times while dealing with mortgages, you will hear an array of terms. Fixed, variable, closed, open, term, and amortization to name a few. To some, these terms are common and people may be familiar with them. However, for others who are new to home buying this may sound like a foreign language. Listed blow are a few of the terms defined:

Fixed – An interest rate that remains the same throughout the term of the mortgage

Variable – An interest rate that fluctuates based on a lender’s prime rate

Open – An option allowing early repayment of the mortgage principal without penalty or notice

Closed – A mortgage with no option to repay the outstanding principal balance unless the property is sold to an arm’s length purchaser

Term – This is a period of time in which the loan is repaid, typically anywhere between six months and five years (although longer terms are available). The mortgage contract is based on this term and, at the end of the term, the contract comes up for renewal.

Amortization – The amortization refers to the total amount of time that it will take to repay the mortgage. The most common amortization is 25 years, although there are several different lengths currently available.