Mortgage FinancingChapter 2 · 40 practice questions

Chapter 2: Mortgage Loan Insurance (CMHC/SCHL)

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Overview

This chapter examines mortgage loan insurance provided by the Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation. CMHC insurance protects lenders against borrower default on high‑ratio mortgages—loans where the down payment is less than 20% of the purchase price. Although the borrower pays the premium, the primary beneficiary is the lender, who can recover capital if the borrower defaults and the foreclosure sale proceeds are insufficient. The chapter covers when insurance is mandatory, how premiums are calculated and paid, minimum down payment rules, conditions for portability and refunds, and the claims process.

Portability of Mortgage Insurance Portability of Mortgage Insurance — CMHC Transfer of existing insurance to a new property — Eligibility conditions and criteria CONDITION 1 Substitution of security The lender must accept the replacement of the old property with the new one as security for the loan. ✓ Written consent of lender required CONDITION 2 New property eligible ✓ Occupancy: owner-occupied ✓ Maximum price: $1.5M (since Dec. 15, 2024) ✓ Amortization ≤ 25 years for high-ratio CONDITION 3 Insurance premium ✓ No new full premium Minor adjustments possible Initial premium earned if refinancing ✓ RESULT Easier moving without additional insurance fees ⚠ IMPORTANT NOTE Portability does not apply automatically if the loan balance or the value of the new property differs significantly. REMINDER — CMHC ELIGIBILITY CRITERIA FOR INSURED LOAN Minimum down payment Maximum purchase price Max. amortization Occupancy Premium refund 5 yrs 5% / 10% two tiers $1.5M 25 years Owner-occupied Partial refund possible

Key Concepts

MORTGAGE LOAN INSURANCE (CMHC/SCHL) — Module QC-FIN WHAT IS CMHC INSURANCE? • Mandatory when down payment < 20% • Protects the LENDER, not the borrower • CMHC = Canada Mortgage & Housing Corp. • SCHL = Société canadienne d'hypothèques • Also: Sagen, Canada Guaranty (private) WHEN IS IT REQUIRED? • Conventional loan: ≥ 20% down → NO insurance • High-ratio: < 20% down → insurance REQUIRED • Minimum down payment: 5% (first $500k) • 10% for portion $500k–$999k • New rules: 20% down if home > $1.5M PREMIUM CALCULATION • Premium added to mortgage amount • Sliding scale based on down payment % • 5% down → 4.0% of loan amount • 10% down → 3.1% of loan amount • 15% down → 2.8% of loan amount KEY PLAYERS & PROCESS FLOW BORROWER Pays premium (often financed) LENDER Approves loan Receives protection CMHC / SCHL Insures the loan Pays claim if default ALTERNATIVE INSURERS • Sagen Financial • Canada Guaranty (private) CLAIM PROCESS (DEFAULT SCENARIO) 1. DEFAULT OCCURS Borrower fails to pay (typically 3+ months) 2. LENDER CLAIMS Lender files claim with CMHC/SCHL 3. INSURER PAYS CMHC compensates lender (up to 100%) 4. RECOVERY CMHC pursues borrower for amounts paid KEY RULES & NOTES PORTABILITY Insurance can transfer if moving PREMIUM TAX 9% QST applies in Quebec REFUNDS Partial refund if loan paid early

Nature and Purpose of CMHC Mortgage Loan Insurance

CMHC mortgage loan insurance is not a policy that covers the borrower’s payments or protects the property’s value. Its sole purpose is to indemnify the lender for losses incurred after all legal realization procedures (foreclosure, power‑of‑sale, judicial sale) have been completed and a shortfall remains. The borrower benefits indirectly by gaining access to mortgage financing with a lower down payment, often at more favourable interest rates than an uninsured loan would allow.

High‑Ratio vs. Conventional Mortgages

High-Ratio vs Conventional Mortgages High-Ratio vs Conventional Mortgages HIGH-RATIO LOAN Down payment Less than 20% of the purchase price Loan-to-Value ratio (LTV) Greater than 80% Mortgage loan insurance MANDATORY (CMHC) INSURANCE PREMIUM Added to the loan • Non-negotiable Rate based on LTV (e.g., 2.80% at 85% LTV) MAXIMUM AMORTIZATION: 25 YEARS Owner-occupancy required PORTABILITY POSSIBLE To new property if eligible Maximum purchase price: $1.5M (since Dec 15, 2024) Partial refund if repaid ≤ 5 years CONVENTIONAL LOAN Down payment At least 20% of the purchase price Loan-to-Value ratio (LTV) 80% or less Mortgage loan insurance NOT REQUIRED INSURANCE PREMIUM No premium to pay Savings compared to insured loan AMORTIZATION: NO CMHC LIMIT Up to 30 years possible (depending on lender) NO CMHC PORTABILITY No CMHC occupancy restrictions No maximum purchase price imposed by CMHC No premium to repay or transfer Mandatory insurance No insurance required 20%
Premium Calculation and Payment Premium Calculation and Payment CMHC Mortgage Loan Insurance — Quebec/Canada 1. Purchase Price Purchase price: $300,000 Down payment 15%: $45,000 Loan: $255,000 LTV = 255,000 ÷ 300,000 LTV = 85% 2. Premium Calculation Premium = % of loan amount Rate based on LTV: 85% → 2.80% Premium = 2.80% × $255,000 = $7,140 3. Added to Loan Premium added to principal New loan: $255,000 + $7,140 = $262,140 No upfront out-of-pocket cost CMHC Premium Rate Table (examples) Down Payment Loan-to-Value Ratio Premium Rate Example (loan $255,000) 5% 95% 4.00% $10,200 10% 90% 3.10% $7,905 15% 85% 2.80% $7,140 The premium is calculated on the loan amount, not the purchase price — it is added to the borrowed principal
  • High‑ratio mortgage: A loan where the down payment is less than 20% of the purchase price. CMHC insurance is mandatory for such loans.
  • Conventional mortgage: A loan with a down payment of 20% or more. Insurance is not required, though a lender may still choose to insure it at their discretion.

The legal threshold is 20%, not 25% or any other figure. Even if the down payment meets or exceeds the minimum required by CMHC (e.g., 5% on the first $500,000 and 10% on the remainder), if it is below 20% of the total price, insurance is compulsory.

Minimum Down Payment Calculation Minimum Down Payment Calculation Two-tier rule — CMHC Mortgage Loan Insurance (2025) 1 First Tier 5% on the first $500,000 Rate: 5% ✓ $500,000 × 5% = $25,000 2 Second Tier 10% on the portion above $500,000 Rate: 10% ✓ Up to $1.5M max. EXAMPLE — Property at $600,000 Tier 1: $500,000 × 5% = $25,000 Tier 2: $100,000 × 10% = $10,000 Minimum down payment: $35,000 (5.83% of purchase price) EXAMPLE — Property at $750,000 Tier 1: $500,000 × 5% = $25,000 Tier 2: $250,000 × 10% = $25,000 Minimum down payment: $50,000 (6.67% of purchase price) $0 $500,000 $1.5M max. ■ 5% (0 to $500,000) ■ 10% ($500,000 to $1.5M) ■ Not eligible $35,000 $50,000 Down payment < 20% → CMHC insurance mandatory

Minimum Down Payment Rules (Effective 2025)

For properties with a purchase price of $1.5 million or less, the minimum down payment for an insured mortgage is:

  • 5% on the first $500,000 of the purchase price.
  • 10% on the portion of the price above $500,000 up to $1.5 million.

Examples:

  • Property at $600,000: 5% × $500,000 = $25,000 + 10% × $100,000 = $10,000 → total minimum down payment = $35,000.
  • Property at $750,000: 5% × $500,000 = $25,000 + 10% × $250,000 = $25,000 → total minimum down payment = $50,000.

No CMHC insurance is available for properties priced over $1.5 million (as of December 2024). For such properties, a down payment of at least 20% is required, and the loan must be uninsured (conventional).

Premium Calculation and Payment

The insurance premium is calculated as a percentage of the loan amount (the mortgage principal), not of the purchase price. The premium rate depends on the loan‑to‑value (LTV) ratio—the higher the LTV (i.e., the lower the down payment), the higher the rate. For example, with an 85% LTV (15% down payment), the premium rate is typically around 2.80% of the loan amount.

  • For a $400,000 property with 15% down: loan = $340,000; premium = 2.80% × $340,000 = $9,520.
  • The premium is generally added to the loan principal and repaid over the amortization period, rather than being paid as a lump sum at closing. This avoids a large upfront cost for the borrower.

In some cases, the premium is calculated on the loan amount including the premium itself, but the standard practice in Canada is to add the premium to the loan. The borrower should confirm with the lender how the premium is factored into the total loan amount.

Maximum Amortization Period

Maximum 25-Year Amortization MAXIMUM 25-YEAR AMORTIZATION CMHC Rule — High-ratio mortgages (LTV > 80%) ✓ CMHC-INSURED LOAN High ratio — LTV > 80% Features: Down payment < 20% of purchase price Mandatory insurance — CMHC Premium added to the mortgage Protects the lender against default Maximum amortization period: 25 YEARS maximum regulatory 30 years NOT eligible No premium refund after 5 years. Portability possible to new property. VS ✓ CONVENTIONAL LOAN Conventional — LTV ≤ 80% Features: Down payment ≥ 20% of purchase price No CMHC insurance required No insurance premium to pay Lender assumes risk without guarantee Maximum amortization period: 30 YEARS possible, depends on the lender 25 years Also possible Longer amortization = reduced monthly payments. Higher total interest over the term. Key rule: High-ratio loans (CMHC-insured) are limited to 25-year amortization — conventional loans can go up to 30 years.

For high‑ratio mortgages insured by CMHC (down payment less than 20%), the maximum amortization period is 25 years. Longer amortizations (e.g., 30 years) are not eligible for CMHC insurance and are only available for conventional mortgages with a 20% or larger down payment.

Property Eligibility

CMHC generally insures mortgages only for owner‑occupied properties. Investment properties (e.g., rental properties not occupied by the owner) are typically ineligible for CMHC insurance. Rural properties, variable‑rate mortgages, and borrowers who already own other properties are not automatically disqualified, provided all other criteria are met.

Portability and Loan Assumption

If a borrower moves and wants to transfer their existing CMHC‑insured loan to a new property, portability may be available under the following conditions:

  • The lender agrees to a substitution of collateral (i.e., the new property replaces the old one as security).
  • The new property meets CMHC’s eligibility criteria (owner‑occupancy, maximum price, etc.).

The insurance premium is not fully renewed; only minor adjustments may apply. The loan balance may differ, and the new property’s value may be different, but these are not automatic barriers. Portability allows the borrower to avoid paying a full new premium.

Refund and Non‑Refundability of Premium

  • The insurance premium is non‑refundable upon refinancing the mortgage with the same or another lender. Once the loan is granted, the premium is earned by CMHC.
  • However, if the loan is repaid early (e.g., due to sale of the property or full prepayment) within the first five years of the loan’s origination, the borrower may be eligible for a partial refund of the premium. After five years, no refund is available.
Premium Refund and Non-Refundability Premium Refund and Non-Refundability Loan Origination 5 years After 5 years ✓ Partial Refund • Loan prepaid • Within the first 5 years • Partial premium refund ✗ No Refund • After 5 years from origination • No refund granted ✗ Refinancing • Premium permanently earned by CMHC • Non-refundable and non-transferable ✗ Payment Default • No premium refund • Lender compensation only Legend Refund possible No refund Trigger event General Rule The insurance premium is calculated as a % of the loan amount and added to the mortgage balance. It is not negotiable. Partial refund possible within the first 5 years.
  • The refund is not available if the loan is refinanced or if the borrower defaults.

Claim Process and Surplus After Foreclosure

The lender can make a claim to CMHC only after:

  1. The borrower has defaulted on the mortgage (e.g., missed payments).
  2. All realization procedures have been completed (foreclosure, power‑of‑sale, or judicial sale).
  3. The net proceeds from the sale are insufficient to cover the outstanding loan balance.

A single missed payment is not sufficient to trigger a claim; the lender must exhaust the foreclosure process. A decline in property value alone does not entitle the lender to compensation.

If the foreclosure sale yields a surplus—i.e., the sale price exceeds the total amount owed to the lender and any prior claims—the surplus belongs to the borrower (the debtor), not to CMHC or any other party. This is a fundamental principle under Quebec law: after creditors are paid, any leftover goes to the owner.

Additional Requirements for Self‑Employed Borrowers

Self‑employed individuals seeking a CMHC‑insured mortgage may be required to provide more extensive income documentation than salaried employees. Typically, lenders ask for notices of assessment from the last two or three years, along with business financial statements, to verify income stability. The down payment percentage, the need for a guarantor, or the premium rate are not automatically different for the self‑employed.

Important Regulations, Procedures, and Professional Obligations

  • Maximum purchase price for insured loans: Effective December 15, 2024, the maximum purchase price for a CMHC‑insured mortgage is $1.5 million. This applies to all high‑ratio loans insured by CMHC (other insurers may have different limits).
  • Mandatory insurance threshold: Lenders cannot grant a high‑ratio mortgage without insurance. If a borrower fails to maintain the required insurance (uncommon), the lender would not have advanced the funds in the first place, so the practical consequence is that the borrower cannot obtain financing.
  • No‑reserve‑for‑first‑time‑buyers: CMHC insurance is not limited to first‑time homebuyers; any buyer with a down payment below 20% may apply, provided the property is owner‑occupied.
  • Rate and premium are not negotiable: The CMHC premium rate is set by the corporation based on the LTV ratio and cannot be negotiated by the borrower or the broker.
  • Premium is not refundable upon refinancing: A borrower cannot recover the premium paid on the original loan when refinancing. A new loan may require a new insurance premium if it is again high‑ratio.
  • Professional duty of real estate agents: Agents must clearly explain to clients that the insurance protects the lender, not the borrower, and that the premium is typically added to the loan principal. Disclose the implications of early repayment refunds and portability options.

Relationships Between Concepts

  • Down payment ↔ Loan‑to‑value (LTV) ratio ↔ Premium rate: A lower down payment increases the LTV ratio, which increases the premium rate and the total premium cost. For example, a 5% down payment results in a higher premium rate than a 10% down payment.
  • Refinancing ↔ No refund ↔ New insurance: If a borrower refinances a CMHC‑insured loan, the original premium is not refunded. If the new loan is also high‑ratio, a new insurance premium must be paid.
  • Portability ↔ Substitution of collateral ↔ No new premium: Portability allows the borrower to keep the existing insurance in place when moving to a new eligible property, avoiding a full new premium. This is an exception to the general rule that insurance is tied to a specific property.
  • Default → Foreclosure → Sale → Shortfall → CMHC claim → Surplus to borrower: The chain of events leading to a claim is linear. Only after the sale is finalized and a deficiency remains does CMHC compensate the lender. Any excess belongs to the borrower.
  • Amortization period ↔ Insurability: High‑ratio loans are limited to 25‑year amortization. Conventional loans with 20%+ down can have longer amortizations, but such loans are not eligible for CMHC insurance.

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