If you own or are planning to buy a home in Canada you have likely heard of the Canadian Mortgage and Housing Corporation (CMHC). They are a crown corporation that is assigned the task of maintaining Canada’s housing market on behalf of the federal government. It has been around since 1946 and was initially created to help house veterans returning from WWII. While the creation and maintenance of affordable housing are still one of the mandates of CMHC, they have also branched out into insuring mortgages and developing policy.
The reason we’re talking about CMHC today is because many of us Canadians pay them to get into the housing market. I was curious where that money went and why CMHC actually exists.
What does CMHC do?
While you may know the Canadian Mortgage and Housing Corp for mortgage insurance, they do perform other roles for the federal government. These range from affordable housing initiatives to research, analysis and policy creation. Their goal is to ensure the housing market remains stable and that Canadians have adequate places to live.
Mortgage Loan Insurance
We’re going to start with CMHC’s most well-known role, and the one most likely to have a direct impact on your finances.
Anyone who takes out a mortgage in Canada with a down payment of less than 20% has to get mortgage insurance. There are currently more than 250,000 homes insured under CMHC.
The insurance protects lenders in case you aren’t able to make your payments. If CMHC didn’t back your mortgage, then there is a good chance the banks would charge you a higher interest rate to make up for the added risk of a small down payment. It’s an added cost for consumers, but it can also make buying a home more accessible. The average house price in Canada is almost $500,000. That would mean a down payment of $100,000 to hit the 20% mark. Saving up that much is no easy task, especially when you still have to cover rent, food, retirement savings, etc. I make a good income, and that doesn’t feel attainable; at least not in a timeframe I’d be happy with.
When the bf and I bought our home almost eight years ago, we did put less than 20% down and were insured with CMHC. Looking back, it was the right call. Home prices in the area we chose have skyrocketed in that period. If we had waited until we did have a large enough down payment to avoid CMHC the increase in house prices would have negated any insurance savings. Obviously, that won’t be the case for everyone, but paying for CMHC isn’t always the worst thing.
The Cost of CMHC Insurance
The premium you will pay for your mortgage insurance depends on the cost of the property you’re buying and the size of your down payment. For any down payments less than 20% you will need insurance, but it’s a sliding scale. Premiums increase as your down payment percentage decreases.
Let’s look at a couple of examples. The average home price in Canada is currently sitting just under half a million dollars, so we’re going to use that. And mortgage rates are currently ranging between about 2.2% and 3.3% depending on whether you choose variable or fixed. To keep things simple we’ll assume a 3% rate with 25 years amortization.
If you put down 5% on a $500,000 mortgage your CMHC premium will be $19,000 or 4%.
If you instead put down 10% with those same terms, your CMHC premium will be $13,500 or 3.10%
As you can see, even if you aren’t able to hit the 20% downpayment, it still makes sense to make as large a down payment as possible to reduce your insurance costs.
If you’re looking to go green, you can receive a refund of up to 25% on your premiums. Something to keep in mind if you were considering an energy efficient home.
On behalf of the federal government, CMHC works with numerous non-profit and private sector housing groups to build and manage affordable housing across the country. This is done primarily in coordination with provincial and territorial affordable housing programs.
As a crown corporation, CMHC can access federal funds at a lower cost and can pass those savings on in the form of low-cost loans for sponsors taking on social housing projects.
They currently provide approximately 2 billion dollars of federal money each year for the creation and maintenance of such initiatives.
First Nation Housing
There is a particular need for improvement in housing in many First Nation communities across the country, and this is a primary focus for CMHC. Again with funding from the Canadian government, CMHC manages on-reserve programs that both renovate substandard homes and build new units for the communities.
By providing a guarantee on residential mortgages, CMHC gives lenders (the banks) the ability to package up those loans and sell them as mortgage-backed securities. If you know anything about the US housing crash (or watched The Big Short), you’ll have heard that term before.
The idea behind mortgage-backed securities is that the bank can pool together a whole bunch of mortgages and then sell them as a secure investment to other customers. It’s a way of raising funds to pay for more mortgages. The problem in the US was that there were a whole bunch of risky mortgages and people started defaulting. Those ‘secure’ investments all of a sudden weren’t looking so secure. They depend on people paying their mortgages so interest payments can be made to the owners of the securities.
In Canada, CMHC backs many of those higher-risk mortgages so if they do go into default they cover the cost instead of the bank or a private insurer.
Policy and Research
CMHC is a leading source for analysis and forecasting for Canada’s housing market. You can find a wealth of data on their website concerning housing prices, new housing starts, rental prices and vacancy rates, etc. You can pull data from a national level right down to a neighbourhood level. It’s kind of a fun tool to play around with.
Based on their research, CMHC also acts as the advisor to the Canadian government when it comes to the implementation of housing policy.
I’ll be honest; I didn’t realize that CMHC had more to do with housing than just charging me more for a mortgage. It turns out they are a little more important than that!
This post was proofread by Grammarly.