The Canadian Mortgage and Housing Corporation (CMHC) is an integral component of Canada’s housing market. When considering a home purchase in Canada, you should be familiar with their programs and opportunities and what you need to qualify for a mortgage according to the CMHC. While the CMHC alone does not contain everything you need to know about real estate, they adapt to new regulatory and economic environments. In response to the Coronavirus Pandemic, the CMHC quickly mobilized to stop federally funded housing providers from evicting Canadians. They also helped with mortgages through their mortgage deferral program. Understanding how the CMHC works and staying updated will allow you to take full advantage of the real estate market. They handle several important functions in the real estate market including their first-time home buyer incentive program, mortgage stress test, and CMHC mortgage insurance. No matter how you are involved in real estate, the CMHC and its programs affect you in one way or another.
What is the CMHC and what does it do?
First named the Central Mortgage and Housing Corporation in 1946, it started as a Crown Corporation responsible for providing homes to returning war veterans. Since then, its mission has evolved to help make housing affordable for all Canadian residents, which includes non-Canadian citizens. Their official mission is to give everyone in Canada an affordable home that meets their needs by 2030.
While the CMHC’s primary role is to provide insurance on mortgage loans for home-buyers, they also provide several programs, tools, and opportunities to the general public. For example, they have programs for low-income homebuyers, distribute a significant amount of information concerning the current housing market, and provide assistance with other forms of housing.
As a crown corporation, the CMHC’s objectives often align with the government’s, but they operate independently and without significant government intervention. Their board of directors is appointed by various government entities and they collectively run the corporation. Among these directors, the Deputy Minister of the Minister for CMHC and the Deputy Minister of Finance report directly to the government and act in the government’s interest. The government also appoints the Chair and the President and CEO.
The CMHC provides mandatory CMHC mortgage insurance for homebuyers who provide less than a 20% down payment on their mortgage loan. Should you default on your loan, the CMHC will provide the lender with the scheduled monthly repayments. Your lender is the one who applies for the mortgage insurance but the costs of the insurance premium are generally paid by you through increased monthly mortgage payments. Therefore, you should consider the CMHC insurance costs in your mortgage calculation. If you can afford it, making a larger down payment will decrease your loan-to-value (LTV) and reduce your monthly costs associated with the insurance premium.
In Manitoba, Quebec, Ontario, and Saskatchewan, the CMHC insurance premiums are subject to provincial sales tax, so you cannot add it to your mortgage loan and it will be included as part of your closing costs.
First-Time Home Buyer Incentive
As a first-time homebuyer, saving enough money to make a large down-payment on your home may be a financial burden that you cannot afford. The First-Time Home Buyer Incentive (FTHBI) allows you to reduce your total mortgage by letting the government claim a piece of equity in your home. Introduced in 2019, the FTHBI is a program that allows the government to pay a 5% or 10% down payment on your home at the time of purchase. This incentive is targeted towards household incomes of less than $120,000 and you must make your down payment of at least 5% of the home value. This could allow you to reach the 20% down payment required to avoid paying for mortgage insurance or could just simply reduce your total mortgage costs. However, the government will own a portion of your home, and in 25 years, or earlier if you sell it, the government will collect the same percentage of your home value. While the government may own a portion of your home, they will not foreclose it and you can live with no risk other than your mortgage loan payments themself until you have to repay the down payment.
Alternatively, you may opt to use up to $35,000 from your Registered Retirement Savings Plan (RRSP), which must be paid back over the 15 years that follow. This method has its benefits because you are using your own money rather than the government’s. While the government will not have control over your home, using your own money means that you are paying yourself back and any appreciations in the value of your house are wholly yours should you decide to sell it.
CMHC Newcomers Program
The CMHC Newcomers program makes it easier for non-Canadian citizens to buy their first home. As a new citizen, you will not have an established credit rating or employment history that is viable for a mortgage in Canada, so it is often difficult to qualify. If at all possible, even if you are not a newcomer, you should focus on improving your credit score. However, if you would like to buy a house and have not had the time to build your credit using conventional methods within Canada, you can establish your creditworthiness by providing an international credit card or confirmation of your rental payments for the previous 12 months plus one other financial obligation. The CMHC Newcomers program will evaluate your financial history and evaluate your ability to make payments. The program also offers a series of fact sheets and guides that can help lead newcomers through the process of renting or buying their home.
CMHC Stress Test
The CMHC Stress test helps protect the Canadian economy and Canadian homebuyers from increases in interest rates by ensuring that homebuyers will be able to afford their mortgage payments under different economic climates. Because mortgage rates in Canada have been extremely low due to government stimulus policies, mortgage rates are likely to increase in the future. As a mortgage applicant, you are obligated to provide financial documents that support your ability to sustain mortgage payments in the event of a 2% interest rate increase and a rate matching the Bank of Canada 5-year mortgage stress test rate. Before using your maximum mortgage loan amount to make real estate decisions, make sure you do a stress test calculation to see if you truly have that large of a loan available.
Canada Mortgage Bond Program
The Canada Mortgage Bond (CMB) program works to enhance reliable funding resources for mortgages by offering a coupon-paying, bullet maturity bond that is guaranteed by the CMHC. Approved financial institutions use insured mortgages to create stable and government-guaranteed bonds that can be purchased. The proceeds from the sale of the CMBs are used to buy insured eligible residential loans.
Green Home Program
The Green Home program offers homebuyers who paid for the CMHC mortgage insurance up to a 25% rebate if their home meets certain requirements. When purchasing, renovating, or building a home, ensure that you consider Green Home program. If you are required to pay mortgage insurance premiums, the energy-efficiency ratings applicable to your housing unit could reduce your costs. Some factors that could affect your rating include the home’s energy efficiency, year-round habitability, creditworthiness, and other mortgage details.
Do your research
No matter what applies to you and how you are deciding to purchase your home, understanding the many programs available to you through the CMHC will prove to be beneficial when you close on your mortgage. By using real estate calculators and tools, you can better grasp your potential mortgages and homes. Doing the research now will save you time in the future and allow you to make a sound financial decision when the time comes.