What is the primary purpose of CMHC mortgage default insurance?

Q: What is the correct answer to: What is the primary purpose of CMHC mortgage default insurance?

The correct answer is To protect lenders against borrower default. Option B is correct because CMHC mortgage default insurance specifically protects lenders against financial loss when borrowers default on their mortgage payments. Under the National Housing Act and CMHC's mandate, this insurance transfers the risk of borrower default from the lending institution to CMHC. When a borrower defaults, CMHC compensates the lender for their losses, allowing lenders to offer high-ratio mortgages with confidence. This protection enables the broader mortgage market to function effectively while maintaining lender liquidity and stability.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

CMHC (Canada Mortgage and Housing Corporation) is a Crown corporation that provides mortgage default insurance under the National Housing Act. This insurance is mandatory for high-ratio mortgages where the loan-to-value ratio exceeds 80% (down payment less than 20%). The insurance premium ranges from 0.6% to 4.5% of the mortgage amount, depending on the down payment size and amortization period. Borrowers pay the premium but lenders are the beneficiaries. Other providers like Genworth Financial and Canada Guaranty also offer similar insurance. This system enables broader homeownership access while maintaining lending institution stability and liquidity in the mortgage market.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember 'LENDER' - the insurance protects the LENDER, not the borrower. Think of it like car insurance protecting the bank that financed your car loan, not protecting you from accidents. The borrower pays the premium, but the LENDER gets the protection if payments stop. When you see CMHC insurance questions, immediately ask 'Who gets protected?' and remember LENDER. This helps distinguish between borrower benefits (like lower down payments) versus the actual insurance protection (which goes to lenders).

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

Focus on who receives the protection, not who pays the premium. CMHC insurance always protects lenders from default losses, even though borrowers pay the premium. Look for 'protect lenders' or 'lender risk' in answer choices.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

Sarah wants to buy a $500,000 home with only $40,000 down (8%). The bank requires CMHC insurance because this is a high-ratio mortgage. Sarah pays the insurance premium of approximately $19,000, but if she later defaults on payments, CMHC pays the bank for their losses, not Sarah. The bank can still pursue foreclosure against Sarah, but their financial risk is covered by CMHC. This protection allows the bank to confidently lend with the lower down payment.

Question

Mortgage & Real Estate FinanceCmhc InsuranceONEASY

What is the primary purpose of CMHC mortgage default insurance?

Answer Options

A

To protect borrowers from foreclosure

B

To protect lenders against borrower default

C

To guarantee interest rates for borrowers

D

To provide down payment assistance to buyers