Homeowners: What are CMHC Fees And Will You Be Charged Them?
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New Homeowners: What are CMHC Fees And Will You Be Charged Them?

 

Buying a home in Canada can be a frustrating and daunting task. So many rules, so many different options. It can feel nearly impossible to be fully informed as you embark on this journey towards owning your own home. One of the most overlooked aspects of buying a house is CMHC fees. Let’s take a moment to discover what these fees mean for you.

What is the CMHC?

The CMHC is the Canadian Mortgage and Housing Corporation. It’s a crown corporation. This means that it’s publicly owned by the taxpayers. The primary focus of the CMHC is to offer stability to the housing market, but it also provides affordable housing solutions and helps enable Canadians to become homeowners.

When it comes down to buying a house, there’s really only one function of the CMHC that you need to concern yourself with: Mortgage Loan Insurance.

What is 'Mortgage Loan Insurance'?

Offered by the CMHC, Mortgage Loan Insurance is a service which is designed to protect the lenders from defaulted loans by giving them the opportunity to recoup their losses. This protection enables lenders to approve more mortgages than they otherwise would be able to.

Let's boil it all down…

Because of the CMHC, there is actually a higher likelihood that you will be approved for a mortgage. However, it’s important to note that not all mortgages are covered by the CMHC – so, how do you know if yours will be?

Reasons why your mortgage will be insured by the CMHC:

1·         Putting less than 20% of the purchase price down

- A down payment less than 20% of the price of your home, means you're considered at higher risk of defaulting. If this is the case, your mortgage must be insured by the CMHC.

2·         Your property isn't marketable

- Maybe you live in a remote location or the place damaged or run-down. In the event that the lender sees your property as being something tough to resell, it puts them at a greater risk. If someone defaults on their mortgage, the lender will take possession of the property in an effort to recoup their losses. If they are unable to find a buyer, it means that they’re out of pocket for the cost of the mortgage. To prevent this from happening, the mortgage is insured. This gives them greater confidence and reduces the risk on their end.

CMHC fees

However... Accompanying the benefits of insurance, are the premiums that you'll be responsible for paying. Typically they’re tacked on to your monthly mortgage payments, but some home buyers decide to pay these premiums in a lump sum upfront.

The CMHC fees are only the start of the fees you'll encounter when buying a new home! Check out all the hidden fees of buying a new home here!

 

 

How The Rise of CMHC Insurance Premiums Affects You

Effective January 1st, 2017, the regulations for mortgage insurers required them to increase the capital they hold against the mortgages they serve.

Mortgage Default Insurance

Canadians who put less that a 20% down payment on the home they are purchasing are required by law to get mortgage default insurance. This insurance protects the lender if you default on the money you’ve borrowed.

How much this will affect you is determined by your loan-to-value ratio. This is the ratio of your mortgage to the value of your home. The higher your loan-to-value ratio is, the more of a rate hike in your insurance premiums you will see.

Critics of these hikes suggest that they are just another attempt at slowing down the red hot Canadian real estate market, but are unnecessary and will not have the impact they are intended to.

New Premiums

The new mortgage insurance premium increases are set to begin on March 17th of 2017, but CMHC representatives don’t seem to think you will feel the increase too much. In fact, they suggest that the average Canadian will only have to pay $5 more per month and that Canadian's ability to buy a home will not be affected at all. However, over the course of your mortgage, $5 per month does add up.

Looking at the big picture, it does seem to be a small change when you compare it to the other major changes that have affected the rules of buying a home in Canada. The new mortgage stress test and down payment requirements are much larger hurdles that Canadians must overcome to be able to purchase a home. An increase in insurance premiums by $5 per month seems almost trivial next to having to qualify for your mortgage at the Bank of Canada’s interest rate, rather than the lower variable interest rate.

So, while this small amount will add up over time, and it’s just another drain on your already stressed pockets, it’s not the biggest thing we have to worry about. It sure would be nice to wake up to the news that costs are falling for once, though, wouldn’t it?

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Do you know how high your credit score should be in order to get approved for a mortgage? Check out this post to find out! What can you do if your score isn't high enough? Refresh Financial has a cash secured loan which is one of the best ways to increase your credit score!

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