If you are buying a home in Canada with less than 20 percent down, you have probably heard you will need CMHC insurance. But what exactly is it? Who does it protect? How much does it cost? And is putting more money down to avoid it actually worth it?
These are some of the most common questions I get from first-time buyers and even repeat buyers who have not thought carefully about this piece of their purchase.
What CMHC Insurance Actually Is
Mortgage default insurance — commonly called CMHC insurance after the Canada Mortgage and Housing Corporation — is insurance that protects the lender, not you, if you default on your mortgage. When you put less than 20 percent down, your lender is taking on more risk. Default insurance transfers that risk to the insurer. If you stop making payments and the lender has to sell the home at a loss, the insurer covers the lender’s shortfall.
Here is the key thing to understand: this insurance protects your lender, not you. But you pay for it. That is the trade-off that makes low-down-payment mortgages available in Canada.
How Much Does It Cost?
The premium is calculated as a percentage of your mortgage amount, not your purchase price. The rate depends on your down payment: 5 to 9.99 percent down carries a 4.00 percent premium; 10 to 14.99 percent down carries a 3.10 percent premium; 15 to 19.99 percent down carries a 2.80 percent premium.
The premium is added to your mortgage balance, not paid as cash at closing. On a $600,000 home with 5 percent down, your mortgage is $570,000. The 4 percent premium is $22,800, making your insured mortgage $592,800. Amortized over 25 years, the premium adds roughly $130 to $150 per month to your payment.
Is Putting 20 Percent Down to Avoid It Worth It?
This is the question I get asked most often, and the answer is genuinely not always obvious. On a $600,000 home, 20 percent down is $120,000 and 5 percent down is $30,000. The difference is $90,000. The insurance premium at 5 percent down is approximately $22,800. So you are spending $90,000 extra upfront to avoid $22,800 in insurance costs, with the remaining $67,200 in additional down payment reducing your mortgage balance and ongoing interest.
Whether that trade-off makes sense depends on what else you could do with $90,000 in cash, your cash flow situation, and how long you plan to keep the mortgage. In many cases, preserving liquidity — for an emergency fund, renovation costs, or other goals — is worth the insurance premium. In others, putting 20 percent down and having a lower monthly payment from day one is the right call. This is exactly the kind of analysis I walk through with every buyer who is close to that threshold.
What CMHC Insurance Enables
The most important thing CMHC insurance does is provide access. Without it, getting a mortgage with less than 20 percent down at most Canadian lenders would not be possible. For first-time buyers who have been saving diligently but have not yet reached 20 percent of today’s Vancouver Island home prices, CMHC insurance is often what makes homeownership possible now rather than years from now. The premium is real, but so is the opportunity cost of waiting.
There is no universal right answer on 5 percent versus 20 percent — there is a right answer for your specific situation. Let’s find it.
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