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Understanding mortgage default insurance.

As seen in New Home Guide Metro Vancouver

Mortgage default insurance is commonly referred to as mortgage insurance. It is often mistaken with homeowner/ property insurance or mortgage life insurance. Homeowner/ property insurance protects the individual’s home and possessions in the home against damages including loss, theft, fire or other unforeseen disasters. Mortgage life insurance is designed to repay any outstanding mortgage debt in the event the homeowner death or long-term disability.

home & calclatorThe mortgage default insurance increases the opportunities for homeownership with a low down payment as saving for a 20% down payment can be difficult in today’s housing market. There are two types of mortgage options; conventional mortgages which are loans with a minimum 20% down payment and high ratio mortgages are loans with less than 20% down payment. 

In Canada, mortgage insurance is required by the Government of Canada on all high-ratio mortgages. The insurance protects the mortgage lender only against a loss caused by non-payment of the mortgage by the borrower and it is not a protection for the homeowner. However, the mortgage insurance enables borrowers to purchase a home with a minimum down payment of 5%. 

Mortgage default insurance is provided by insurers such as Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada and Canada Guaranty. Each mortgage insurer has its own criteria for evaluating the borrower and the property and it decides whether or not a mortgage can be insured. The lender and not the borrower selects the mortgage insurer. It is possible that the mortgage application can be approved by the lender but might not be approved by the insurer. 

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The mortgage default insurance premium is a one-time charge and it is paid by the borrower to the lender. The premium can be paid in a single lump sum at the time of closing or it can be added to the mortgage amount and repaid over the amortization period (or the life of the mortgage). The cost of default insurance is calculated by multiplying the amount of the funds that are being borrowed by the default insurance premium, which typically varies between 0.5% and 6.0%. Premiums vary depending on the amortization period of the mortgage, the loan to value ratio, the size of the down payment and the product.

Example of a premium calculation for a home purchase:

Property value:                                 $400,000

Down payment:                                5% or $20,000

Mortgage basic loan amount:       $400,000 – $20,000 = $380,000

Amortization period:                       25 years

Loan to value ratio:                          95%

Premium amount:                            $380,000 x 3.60%

Default insurance cost:                  $13,680

Total mortgage amount:                $393,680

* The cost of default insurance is subject to change if the purchase price or appraised value, the amount of down payment or the amortization changes. The final premium and the cost of the mortgage default insurance will be disclosed in the mortgage commitment document from the lender.

It is important to note that for insured mortgage loans the maximum purchase price or as-improved property value must be below $1,000,000. The borrowers can port the mortgage loan insurance from an existing home to a new home and may be able to save money by reducing or eliminating the premium on the financing of the new home.

Since there are different products available from individual lenders and are subject to lender’s guidelines, it is important to give me a call so I can analyze your situation, present several options and help you decide which product works best for you.

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How to Finance Renovations on your New Home

If you need to renovate your new home, there are innovative mortgage programs that can help you out. As seen in REW.ca

With house prices continually rising, sometimes the only home you can afford is a home that needs a bit of updating or needs renovations. But traditional financing can sometimes make these types of home unaffordable. That’s because you first have to come up with a down payment to qualify for a mortgage for the purchase price. Then as soon as you take possession, you have to qualify for some kind of home improvement loan. Not only is it difficult to qualify for two separate loans at the same time, it also makes buying more expensive.

Fapartment-renovations-17899498ortunately, there are innovative programs from mortgage insurers such
as CMHC and Genworth that are designed for just this purpose. These programs helps qualified homebuyers make their new home just right for them, by making customized improvements, immediately after taking possession of their new home. All this is done with one manageable mortgage and with as little as 5 per cent down.

The improvements to be made under such programs can’t include structural changes to the home. Some of the improvements allowed include:

  • Updating or renovating kitchen
  • Updating or renovating bathrooms
  • New flooring
  • New paint
  • Finishing or renovating basement
  • New patio or deck
  • New energy windows/doors
  • Addition of garage, etc.

Some of the parameters of the program include:

  • As low as 5 per cent down payment (conditions apply)
  • Depending on the insurer, you can go up to 20 per cent of the purchase price with a maximum of $40,000 or 10 per cent of the as-improved value
  • Owner-occupied properties only
  • Down payment is based on the as-improved value
  • Other conditions apply

For example, the CMHC Improvements program lets qualified buyers borrow up to 10 per cent of the post-renovation value of a house and use that money to cover the cost of renovations.

Let’s say the house’s purchase price is $400,000 and the renovations you have in mind would increase its value by $40,000. That means the post-renovation value would be $440,000 so you could borrow $40,000 to cover the renovations.

Let’s See the Monthly Savings:

Straight mortgage with $40,000 line of credit:

  • Purchase price $400,000
  • Down payment $20,000
  • Improvements using line of credit $40,000
  • $1,773.51* mortgage + line of credit $316.67** per month
  • Total monthly payments: $2,090.17*

Purchase Plus Improvements:

  • Purchase price $440,000
  • Down payment $22,000
  • Total monthly payments $1,857.52*
  • Improved cash flow and lower interest costs
  • Living in dream home

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To qualify, you have to provide a quote from a contractor or suppliers at the time of submitting the application to the lender. Once insurer (CMHC or Genworth) and your lender approve the renovation amount, it’s then added to your mortgage loan. However, you don’t receive the funds until the renovation is complete and has been appraised or inspected. This usually means you will need a short-term line of credit or come up with the funds ahead of time.

The best option is to work with a mortgage expert, such as myself, who has partnered with renovators and suppliers to make this program even more attractive. The renovator and suppliers will take care of the financing for you until the project is finished. Once the work is complete the solicitor will pay them directly the cost of the renovation. You will be rest assured that there will be no cost overruns (unless due to unforeseen circumstances), hidden costs and that the job will be completed on time and on budget.

The good news is that Alisa Aragon from Your Mortgage Solutions Group has partnered with renovators and suppliers to make this program even more attractive. The renovator and suppliers will take care of the financing for you until the project is finished. Once the work is complete the solicitor will pay them directly the cost of the renovation. You will be rest assured that there will be no cost overruns (unless due to unforeseen circumstances), hidden costs and that the job will be completed on time and on budget.

To see whether this type of program can help you affordably improve your new house into the home of your dreams, talk to a mortgage expert and we will provide you with a no-charge analysis of your needs and financial situation.

* Mortgage based on 5 per cent down payment with a fixed rate of 2.59 per cent, closed for five years and 25-year amortization
** Line of credit based on interest rate of 9.25 per cent interest payments only


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How this Summer’s New Mortgage Rules Will Affect You

Three significant changes to the CMHC’s mortgage rules will affect qualifying interest rates, down payments and income verification. As seen in REW.ca

The mortgage industry has seen many changes on lending guidelines in the past five years that has made it tougher for prospective homebuyers to qualify. This summer, there are new mortgage rules heading our way.

The changes are intended to continue with the industry’s recent focus on risk management, as per the Office of the Superintendent of Financial Institutions (OSFI) B-21 guidelines. OSFI is an independent agency of the Government of Canada that has a mandate to contribute to the safety and soundness of the Canadian financial system. It is responsible for supervising and regulating federally registered banks, insurers, trusts and mortgage companies, in addition to private pension plans subject to federal oversight.

Now the CMHC (Canadian Mortgage and Housing Corporation) is implementing three policy changes in accordance to OSFI’s B-21 guidelines. These changes will make it harder to get low-ratio insured variable-rate mortgages, mortgages for the self-employed and 100 per cent financing.

The changes are as follows:

  • Qualifying interest rate: The qualifying intcubeerest rate for all mortgages with variable and fixed terms of less than five years will increase from June 30. It will then be either the five-year Benchmark Qualifying Rate from the Bank of Canada (currently at 4.64 per cent) or the contractual mortgage interest rate, whichever is the greater. For fixed-rate mortgages, where the term is five years or more, the qualifying interest rate is the contract interest rate.

CMHC is allowing some flexibility to implement this change, which is to be implemented as early as possible after June 30 and no later than December 31, 2015.

What does this mean for you? Even if you are getting a lower interest rate on a term less than five years, in order to get approved for that rate you still have to qualify at the Benchmark Qualifying Rate (that is, you would be able pay the mortgage if it was at the qualifying rate). Previously, conventional mortgages could qualify at the lender discounted rate.

  • photo_incentives_190Cash back for down payments:  In order to encourage borrowers to save for homeownership, lenders’ cash back programs (where the lender will give the borrower up to 5 per cent of the value of the property in cash after the mortgage has been funded) will no longer be considered an eligible source of down payment unless borrowers can come up with a 5 per cent down payment on their own. This change will become into effect on June 30.
    This means that borrowers will need to get their down payment from traditional sources, such as savings, RRSPs (tax-exempt for first-time home buyers), gifts from immediate family, proceeds from the sale of another property, and so on.
  • Verification of income: Lenders will now be required to obtain “thiincomerd party verification” of income from all borrowers. This means lenders will be more stringent on income and employment verification. All lenders will have to call the employer for verification of tenure, position and income. Many lenders have already started asking for this information for quite some time. Some lenders are asking for bank statements for the past three months showing the deposit of your pay cheque into your bank account if the payroll is not prepared and paid by a third-party company such as ADP or Ceridian. This change will be effective on June 30.

CMHC stopped insuring “stated income” financing for self-employed individuals. Genworth and Canada Guaranty are still offering this program. At this point, we don’t know if there will be any changes.

This means that borrowers are going to have to provide quite a bit more documentation in order to verify income.

Why are All These Changes Happening?

The reason why there hchange-on-the-horizonave been so many mortgage rule changes, and more are on the way, is to ensure that all lenders follow policy and guidelines to include income verification and ratio qualification set up by OSFI. Previously, some lenders have been issuing mortgages without properly obtaining the proof of income. Insurers will be required to do their own due diligence and not only rely on what the lenders are telling them.

In addition, with historic low interest rates, the Government of Canada wants to minimize the risk once interest rates start going up and prevent what happened in the US with mortgage crisis.

While these changes are under way, many lenders have already made these changes on their lending guidelines and policies since last year in order to minimize their exposure and reduce risk. While Genworth and Canada Guaranty haven’t announced changes on the third-party verification, because many lenders have, this will be the new norm in the industry.

The good news is that there are still some lenders out there that haven’t adjusted their policies and will not do so until required to do so on June 30. For this and many other reasons, it is beneficial to use a mortgage expert who works with multiple lenders to find the best mortgage for your unique situation. We would be pleased to assist you, we can be reached at 778.893.0525.


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What it means to you with the increase in mortgage premiums from CMHC?

On Friday, CMHC (Canadian Mortgage & Housing Corporation) announced that it will be increasing its mortgage insurance premiums for homeowners and 1-4 unit rental properties premium effective May 1, 2014.

Homebuyers is Canada are required by law to purchase mortgage insurance when they put less than 20% down payment on the purchase price of the home. The homeowner is required to pay for the insurance in case they default on their mortgage and it is a protection for the lender. The increase to the premium will be an average of about 15% more to insure mortgages. This premium is added to the mortgage amount and it is paid throughout the life of the mortgage (amortization period). The increase in premium will affect any purchases that occur on or after May 1, 2014.

There majority of the insurance is provided by CMHC and there are two private insurers to include Genworth Financial and Canada Guarantee. Genworth Financial followed suit by increasing its’ premiums on Friday and most likely Canada Guarantee will do the same.

Prior to the announcement, the premium ranged between 0.5% to 2.75%. As of May 1st, the premiums will range from 0.6% to 3.15%. The premiums charged depend on the amount of the down payment. With a 5% down payment the new premium will be 3.15% and 2.40% for a 10% down payment.

For example, prior to the announcement with a $400,000 home purchase and a 5% down payment the insurance premium would be $10,450. After May 1st, the premium would increase by $1,520 which would translate to $7.29 more per month with a 25 year amortization and a 5 year, fixed rate of 3.09%.

To read more about the CMHC announcement 

As always, we would be pleased to answer any questions you might have.


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There are stricter debt ratio standards on the way as CMHC tightens mortgage rules.

There are stricter debt ratio standards on the way as CMHC tightens mortgage rules.

We are committed to keep you informed so you can take advantage of current guidelines. If you are looking at purchasing, refinancing or investing before the new guidelines come into effect at the end of this year, give us a call so we can find the best options for you.

When CMHC tightened mortgage rules last year, among the changes were stricter debt ratios and income confirmations. For typical borrowers, these are key factors in determining whether or not you’ll get a mortgage. If you’re close to the line on debt and income, last year’s changes have made it more difficult for you to qualify. And unfortunately, things are about to get even more difficult!

CMHC has issued new guidelines for calculating debt ratios and confirming income documents. While most lenders have already been following these rules, CMHC is now closing the “loopholes” that allowed some lenders to offer easier approval for borrowers with tight debt ratios. Here are some of the rules that have been clarified:

  • If you have variable income from things like bonuses, tips and investment income, lenders must use an amount not exceeding the average income of the past two years.
  • If you own other non-owner-occupied rental properties, the principal, interest, property taxes and heat on those properties must be deducted from gross rent revenue or included in “other debt obligations” when Total Debt Service ratio is calculated.
  • For unsecured credit lines and credit cards, no less than 3% of the outstanding balance must be included in monthly debt payments.
  • For secured lines of credit, lenders must factor in “the equivalent” of a payment that’s based on “the outstanding balance amortized over 25 years.”
  • For heating costs, lenders must obtain the actual heating cost records of a property or use a set heating cost formula. This can double or triple the cost factored into debt ratios on larger properties, and reduce it on smaller ones.

Since the new rules take effect on December 31, 2013, it’s important to talk to contact us today  to find the best options with the current guidelines. We still have access to a select group of lenders who may be able to provide the mortgage approval you need. For more information, call us today at 778.893.0525!