My Beef with the CMHC: The Good, The Bad and The Ugly
Ayden Byle
High achieving Sales Person with executive references. Specialties - Healthcare/Tech. As Sales Lead, built sales teams, processes and strategies for various companies that IPO'd or were acquired. Let's Chat!
My Beef with the CMHC: The Good, The Bad and The Ugly
For those of you who don't know what the CMHC is, It's a government backed mortgage default insurance provider and stands for; Canadian Mortgage and Housing Corporation.
Why it's important is because many home buyers are required by law to purchase mortgage default insurance.
Just to be crystal clear, mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower in any way, shape or form. The sole beneficiary is the Lender and yet the borrower is the one paying the premiums. Seem a little unfair? I would certainly agree.
There are some ostensible benefits to consumers and borrowers at first glance...the biggest being that those with only 5% down can still purchase a home and mortgage a full 95% of it's value. Furthermore, a default insured mortgage will typically get you a better interest rate, but in actuality only very slightly. And even these benefits are very much outweighed by the disadvantages for borrowers.
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The first disadvantage of course is that you have to pay for the mortgage insurance yourself, and in many cases it is in the tens of thousands of dollars. If you can't afford this along with all your other closing costs like lawyer fees, appraisals, land transfer tax etc. you are allowed to roll it in with your mortgage. But then you are paying interest on it as well which makes it horrifically expensive over the long run, especially for someone who had cash flow problems to begin with.
The other disadvantage of putting only 5% down and purchasing default insurance is that now you are mortgaging 95% of the value of the home which is much more expensive as you are taking on much more debt, not to mention many borrowers in todays climate will not be approved for that much. As we all know home prices are inflated, interest rates are high and we also have to contend with the government stress test. Getting approved for 95% of a homes value in Toronto can be very challenging and problematic for most.
But perhaps my biggest issue with the CMHC is how they calculate premiums compared to almost all other insurance products. Take car insurance as an example. Suppose I buy a car and I call my insurance company to insure it. And suppose they give me a price of $1000 per year. If I pay them upfront for the year and then sell the car after 6 months and no longer need to insure the car, they will remit me back 50% or 500 dollars. But CMHC doesn't work like this. If I purchase CMHC default insurance I am covered over the full 25 year amortization. But if I sell the house after just 3 years and pay off the mortgage in full and now no longer need insurance as there is no loan, debt or mortgage to be insured, I don't get a nickel back. Again it seems quite unfair and something that should be open to revision by our government.
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