Your CMHC Insurance doesn’t protect YOU

You know that whopping insurance premium you had to pay to CMHC because you had less than 20% for a downpayment? Did you know that CMHC doesn’t consider you off the hook just because you forked over all that money? Here’s a letter I received that highlights the problem:

I have a judgement against me by CMHC from a mortgage that was foreclosed. The property was sold for $205,000, which was originally insured for $238,000. CMHC got a judgement of $33,000 plus interest totaling approx. $51,000 against me because the value of my property went down and I defaulted! I had no idea that this could happen. What do I do now?

A lot of folks are under the impression that if their property goes down in value or interest rates go up and they can’t keep up, they and just walk away from the property; CMHC will cover the bank’s ass on the mortgage and everything will be hunky-dory.

Nu-uh! While it’s true that banks aren’t on the hook for loans that have been CMHC insured – CMHC is, and by extension, taxpayers – that doesn’t mean YOU are off the hook.

But Gail, what about that big fat insurance premium I paid when I took out the mortgage?

You mean the one you rolled into your mortgage and immediately started paying interest on? The one that’s going up as of May this year! That insurance premium? That was just to get CMHC to cover the bank’s butt. You didn’t think the bank would have given you all that mortgage money without CMHC’s guarantee, did you? Not on your life. You would have had to jump though circles of fire to qualify for that mortgage if CMHC hadn’t promised to cover the loan.

Course that doesn’t mean CMHC won’t come after you for any difference between what a property had to be sold for and what the insurance coverage was originally. Here’s how the process works:

Once your mortgage has been in default for 3 months, legal proceedings are started through power of sale and the bank takes possession of your property.

The bank sells the property and submits a claim to CMHC for any shortfall.

CMHC gets a judgment against you as the defaulted mortgagor for this shortfall and CMHC tries to collect.

If this attempt is unsuccessful, the account is forwarded to one of CMHC’s collection agencies.

Guess you didn’t read your CMHC contract. Oh wait a minute, there’s no contract because the bank is CMHCs client and they’re just passing the premium and the liability on to you! So sowwy.

21 Responses to “Your CMHC Insurance doesn’t protect YOU”

  1. Wow! I didn’t know about this. I am never going to get a mortgage again without at least 20% down payment. Avoiding the CMHC sounds like a no-brainer now!

  2. I’m rather glad I didn’t know about all of this when my husband and I were first married almost 20 years ago. We had the money saved for our wedding and his parents paid for our honeymoon (as a gift) and my parents gave us money to put down on a condo. We put 5% down with a CMHC mortgage, bought a condo almost $50,000 under what the bank told us we could afford (because it was exactly what we needed as a starter home), paid the heck off that mortgage with prepayments, etc, sold that condo for 50K more 3 years later, went non-CMHC on a townhome worth only 10K more than the condo, and 6 years later traded that townhouse (worth 130K more than when we bought it) to downsize to another condo which we paid off completely. We were mortgage-free in our mid-thirties with a nice chunk of change in our accounts.

    Obviously not everyone’s going to do that, but if you use it properly, the CMHC mortgage can be a good way for young people to get into the property market. I know, for sure, that if we’d saved for a traditional mortgage then had a our child and got mired in all the other stuff life throws at you, we would not have been as intent on paying off our mortgage as we were in those first few years of marriage.

  3. People are very quick to want to jump on the home-owner band wagon, and because are society is all abount instant gratification, we want to do it now. I am a home owner but reading this blog has made me rethink…. Do I need to spend all that money on a house for my and my fiancee or should we look at renting instead and boost our savings? If we were to rent, not only could we boost our savings, we could also afford a few more luxuries as the cost difference is significant.

    Another point that people seem to forget…. When our parents were buying homes, they bought what they could afford and then stayed there. No moving to a bigger house every four years. Only have three bedrooms and four kids? The kids shared a room. We need to go back to our childhoods, see how the previous generations lived and decide do I need a 2500 sq ft house for my family of three? Or could I be happy with less?

  4. @ Jenn – You were both so smart to focus on being debt free right away. So many newlyweds (myself included) have no clue what an impact paying off their mortgage aggressively will have on their lives when they are older. We have been married for almost 19 years and our mortgage would have been paid off years ago had we been smart right from the beginning. The life portion of our pie was wayyyy too big for the first 5 years. We were lucky, we smartened up and started to take money seriously before we got into trouble.

  5. this just reinforces our intent to pay our mortgage off in 5.5 years. we bought our first house in may last year with only 5% and we have been socking money away to pay off the house ASAP. Our longterm forecast shows the house paid in 5.5 years from now and we are sticking to that plan, we want to be mortgage free by the time I am 40, it will make life so much easier if we are completely debt free. How are we doing it?? we have a rule that our very decent paychecks need to stay in the bank. we do “extra” odd jobs for cash and live off what we make doing it. we will do that until the mortgage is paid, then we can relax and enjoy life, debt free.

  6. So glad we didn’t go through this at all. We had awesome chunk from wedding gifts (30K) and $$ I saved when I was single, RRSP-1st home buyer and with our parents gift, we have about 35% downpayment for our first 3br detached home, 10 years ago, we bought resale at $323K and have a $210K morgage…after 2 mortgage renewal we have $70K left, if everything goes well we should paid off in 5 years…

  7. Great article on how CMHC really works. However that does not mean it is bad it just means that people are responsible for their debts. I am very surprised how many make major financial commitments and have no idea what they are doing.

    As someone who has bought homes with 5% down it is not something you need to be afraid of, you just need to know what that means.

    Financial products are tools and most of them can be used to your advantage.

    whether you should buy a house or not to help you achieve financial freedom has many factors, down payment and CMHC fees are just a part of that decision.

  8. This is my second house, but first as a married couple; both were purchased with CMHC insurance and I cringed each time as I hate giving my hard earned money away! Luckily we will be selling this house in the coming month for a hefty gain and will be banking it and then renting for a while to save even more as we have decided to save enough money to outright buy our next home and not give the bank another sent of our money. We have figured out that if we stick to our budget for a year and a half (two if we want to do a few extras like travel) and work a few extra hours each per week, then a mortgage won’t be in our budget again! Totally worth it!

  9. If there was a party that voted to scrap CMHC and make it mandatory to have 20% down payments for a house, that’s the party I’d be voting for. Essentially, I prefer the capitalist approach of the free market rather than government special programs to decide who can and cannot afford a house. I don’t believe the government should be picking winners and losers. CMHC is effectively government favouring the real estate industry at the expense of the rental market industry.

    I can understand if this was for people close to 20% just to get over the top and could live with that but going to such an extreme low as 5% is an artificial boost to the housing market that helps line the pockets or real estate agents everywhere. I mean this not to attack hard-working professionals of all sorts in the housing sector – I just think they would do just fine in a truly free market.

    If someone owns a rental property, it’s much harder to find tenants when you have to compete with the fact that someone can buy a house with 5% down and 30-40 year amortizations (although Flaherty is FINALLY restraining that somewhat).

    No I don’t own a rental property. This isn’t out of self-interest for me, I’m just more capitalist in philosophy than the average Canadian.

  10. This is just another reason why I choose to rent. My apartment would be perfect if it was sound proofed and insulated, which I would do if I owned it but I don’t. The new laws are meant to keep people like me off the property ladder. I’m fine with it.

  11. “Guess you didn’t read your CMHC contract. Oh wait a minute, there’s no contract because the bank is CMHCs client and they’re just passing the premium and the liability on to you! So sowwy.”

    I am all for Gail’s tough love policy, but people come to this blog for help and advice. How does this advice help someone who is in this situation? Or give any sort of indication on how to avoid this awful situation?

  12. WolfSong Says:
    March 6, 2014 at 8:03 pm

    CMHC also likes to change the rules depending on where and what you’re buying.
    We bought 80 acres, within 30 minutes of the major city in our province, had 40% down, and *still* CMHC wanted their share. The only way we were going to get out of having to pay them was to have 85% down.
    Ridiculous!
    The reasons given had to do with land size, and distance from the city. Neither, supposedly, made the property “desireable” if we defaulted and the credit union had to re-sell it. I called bullshit on that, considering the place was sold(to us, with 6 other people looking at it!) within 2 days of listing.
    Thankfully, even though there were better offers on the table, the seller accepted our offer of the list price, because our agent tugged the heartstrings about horses, and our mutual love of them.

  13. “I am all for Gail’s tough love policy, but people come to this blog for help and advice. How does this advice help someone who is in this situation? Or give any sort of indication on how to avoid this awful situation?”

    It tells them not to buy a house until they have a 20% down payment. Sure, no help if you’re already caught in this situation but there are cases where Gail essentially says that one has screwed themselves over and there’s basically no way out. This would be one of them. So the advice is simply to others to not get into the same predicament.

  14. I’ve followed this blog for quite awhile, and this article has an entirely different tone. As a 33 year old who accumulated $140k of student debt which is now paid off, I still have my mortgage remaining. And I used CMHC to take out that mortgage. My mortgage payments, even with CMHC, are less than my previous rent, not that I feel I need to justify to you.

    The “So sowwy” and the phrases that preceded it at the end of this article are immature and short-sighted, and totally out of character. I almost wonder if someone else wrote this post. In the future, please try to offer constructive advice instead of anger.

  15. In case you had any doubt the Canadian real estate market is a total scam, set up to work against the normal average buyer.

    Ingenious! “Insurance”, that buyers are required to pay for, but is for the benefit of the lender!! Ha.

    But Gail…this mortgage related debt (after foreclosure etc.) could be discharged in a consumer proposal could it not? (unlike an actual existing mortgage?)

  16. @ KC2 – the program has made home ownership a reality for hundreds of thousands of Canadians, which is a net benefit to the Canadian economy as whole. Simply eliminating it is at best, near-sighted. Adjusting it, tweaking it, etc. I don’t believe that homeownership should just be for the rich, it should be attainable for all responsible, bill paying people. It’s hard to save $140,000 (assuming house of $700,000 about right for a starter in TO) while paying $2500 rent each month too.

    To the people asking Gail to be more helpful in her response, I don’t think there’s much you can do. You signed something without reading it, and did stuff you shouldn’t have, and are now being held accountable for your actions. Tough love is still real love.

  17. This is the reason why I walked away from a house before Christmas. I had an accepted offer on a house. I got it for under asking in a good area. I was excited about this new phase in my life. However, I only had enough to provide for the 5% down and when my bank person told me about the insurance I had to pay because I do not have the 20% down…the insurance was more then the 5% down payment. It seem counterintuitive. So I walked away.
    At times I feel remorse about walking away but I know that I can just keep plugging away and get that 20 % down!

  18. Well then you shouldn’t be buying in Toronto. I’d love to buy property in my old neighbourhood. I grew up in the heart of Little Italy and absolutely love the neighbourhood but that’s just not realistic. We can’t save $140,000 so instead we bought a condo in the east end of the city in a less desirable neighbourhood with a 20% down payment of $35,000.

    Doing the math, $35,000 is actually 5% of $700,000. Could we have gone the CMHC route and took a whopper of a 95% mortgage on a dream location? That would be an extremely risky move for not only us as individuals, it’s the situation of a significant number of people who are only staying afloat based on cheap interest. That’s what CMHC encourages – buying property you can’t really afford.

    At this point, we actually were able to save more money while living in our small cheap condo in a less than desirable neighbourhood in Toronto and decided we wanted more space so we sold it, made a bit of profit which we combined with our savings to purchase a larger home in suburbia. We still can’t afford to live in Little Italy or any of Toronto’s desirable locations. We could if we took a CMHC loan but we don’t believe it’s worth the financial risk.

    People should buy what they can afford and where they can afford and if someone can only muster a 5% down payment and needs a 95% mortgage with 35-year amortization, that’s not really something you can afford once interest rates normalize.

    I may be extreme in suggesting that the program be eliminated altogether, there’s probably a middle ground somewhere but the status quo puts a lot of people in potentially precarious situations.

  19. I think KC2 makes a lot of sense. And I have questions about this assertion above:

    “the program has made home ownership a reality for hundreds of thousands of Canadians, which is a net benefit to the Canadian economy as whole.”

    My question is: is it really a net benefit to the Canadian economy? And if so, how? And in comparison to what?

    Here in the States, home ownership became a net downfall for millions, including many who still own their homes, as well as for many in the real estate and construction industries.

    I wonder if fewer an economy with few homeowners and more renters would actually provide more flexibility for people to relocate as needed (i.e. to where jobs are, to where family is, to where people would like to move, etc), and more flexibility to retain their hard-earned savings for a range of purposes, therefore benefiting the economy more in a variety of different ways.

  20. While I understand the warnings about the CMHC and all that goes along with it…we did the “unthinkable” and got a 0 down mortgage over 6 years ago. It was going to cost more to rent a tiny old place than to purchase a (modest) home that was older than us and reno on the cheap while living in it. Even though it goes against all money advice here (and I do respect the info shared here) it was the best choice for us. We are just fine financially (and in better shape each year) but in the situation at the time…it was the way to go. Housing is a crappy situation rent or buy…where we live.

  21. This is *very* simple to wrap one’s head around isn’t it? If you buy a house using a loan for $500K, the housing market tanks, you decide you can’t afford it and walk away from it 5 years later and the bank can only get $200K for it, who did the writer expect was going to cover the $200K shortfall? You have to pay back exactly what you borrowed plus interest–no matter what something’s worth now. CMHC is there to protect the bank’s interest, not the buyer’s.

    Haha… I find it a little fun that some people here question Gail’s “tone”. Have you seen the woman? She’s been on TV shows and the radio, that’s who she is, I don’t see any difference here except she tries to leave out the 4-letter words that she uses live.

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