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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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Mortgage insurance rates are raising

If you are planning to buy a property with less than 10% down payment expect to pay a bit more. As seen in Metro Vancouver New Home Guide.

CMHC and Genworth have announced that starting June 1st, all homebuyers that are putting less than ten per cent will be paying a higher mortgage default insurance. This is commonly referred to as simple “mortgage insurance”.

The mortgage default insurance increases the opportunities for homeownership with a low down payment as saving for a 20 per cent 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 per cent down payment and high ratio mortgages are loans with less than 20 per cent down payment.

bankAs per the Bank Act, mortgage insurance is required 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, mortgage insurance enables borrowers to purchase a home with a minimum down payment of five per cent.

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.

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 per cent and 6.0 per cent. Premiums vary depending on the amortization period of the mortgage, the loan to value ratio, the size of the down payment and the product.

In May 2014, CMHC increased the mortgage default premium for all high-ratio mortgages regardless of the loan to value. However, this new increase will be the second increase for buyers that are putting less than 10 per cent down payment which is more than 56 per cent of CMHC insured borrowers. History has shown that once CMHC increased their premium, Genworth and Canada Guaranty follow suit.

The new rate for a loan to value up to 95 per cent will increase to 3.60 per cent from the current 3.15 per cent. This will mean an approximate increase of $450 of mortgage default insurance for every $100,000 of a mortgage. In addition, a non-traditional down payment (where you borrow the down payment with a loan, unsecured line of credit or a cash back program), the premium will increase to 3.85 per cent from 3.35 per cent. This increase will not impact any homeowners that are currently insured. This increase will have an impact for anyone that is buying a property.

What does this mean in dollar and cents?CMHC increase in premium

What does this mean to me?

  • If you are putting less than 10% down payment and your lender has submitted your application to the insurer before June 1st you will be paying the current premium rate. It doesn’t matter if your completion date (when your mortgage closes) is after June 1st.
  • If you have been pre-approved or pre-qualified and you don’t have an accepted offer and approved by the insurer you will have to pay the new premium.

If you are pre-approved, pre-qualified or are looking at purchasing a property, talk to a Mortgage Expert so they can explore your options based on your individual needs.


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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.