Mortgages are usually classified as High-Ratio or Conventional. A conventional mortgage is when you are putting more than a 20% down payment. High-ratio would be when you have less than the 20% down. Mortgage insurance is something that is mandatory on every mortgage that is classified as high-ratio. There is private lenders(or ‘B’ Lenders) that will not require or use mortgage insurance for their loans. They will however still charge you a fee to ‘self insure’ the mortgage.
It is important to know that this insurance is NOT a life insurance on yourself or Fire insurance for your property. Mortgage insurance is a default insurance that covers the lender should the mortgage go into default. It is designed to help people get into a home with less of a down payment as lenders will only lend up to 80%of the homes value without it.
Here is a brief history of mortgage insurance as explained by the Alberta Mortgage Brokers Association course.
‘In the mid to late 1930’s as Canada was struggling with the effects of the Great Depression, The federal Government introduced the National Housing Act (NHA). Some of its objectives were to reduce unemployment by encouraging the construction of homes, improve housing conditions and encourage home ownership by providing loans at low-interest rates.
In 1946 a crown Corporation, Central Mortgage and Housing Corporation, now called Canada Mortgage and Housing Corporation (CMHC) was established to administer the National Housing Act with money from government funds and institutional lenders. At first, the institutional lenders were primarily life insurance companies, but in 1953 new legislation permitted banks to enter the field, and except for special programs, this has been extended to other institutional lenders. The government now no longer uses its money directly for mortgages and instead insures mortgages when a lender provides funds.’
When CMHC started to insure the mortgages rather than lend the money for the mortgage, this caused some noticable changes to the economy:
– A greater stability in the lending field by limiting losses for lenders.
– Increased the number of home ownerships, by limiting the down payment needed for home purchases.
– A reduction in the risk to depositors who used their investments to provide mortgages
– Lower interest rates as CMHC lowered lenders risk
Right now there is two main mortgage insurance companies in Canada – CMHC and Genworth. CMHC is a federal government backed company and Genworth is a private insurer. Both have similar products to help those in need of getting a mortgage. They have a variety of financing programs like ones for First time home buyers, New to Canada, Self Employed, and New construction among others.
The fees they charge for the insurance is the same with each of the insurers. It is based on a scale depending on the size of the down payment. The more money you have down, the less risk involved therefore a lower premium.
If the Loan to value is up to 95% the premium is 2.75%. Up to 90% is 2%, Up to 85% – 1.75%, Up to 80% – 1%. These rates are based on amortization of 25 years or less. The Insurers do add an additional premium of .20% for every 5 years amortized over 25 years. For example if you are buying a home with 5% down and you are looking to amortize this over 35 years, your insurance premium would be 3.15%. There is also other premium adjustments for Refinancing, Self employed, and Flex down options. Most banks will require Mortgage insurance on any applications that involve leased land no matter what the down payment is.
So the ugly truth to a home purchase is that this insurance is something that will be needed if the down payment funds are not available. But, Thankfully these insurers are out there. Not everyone has the ability to save $60,000 to buy that $300,000 home they are looking at. But to save $15,000 this is a little easier. With RRSP withdrawal programs available, this makes home ownership even easier.
if you have any questions please email me anytime firstname.lastname@example.org
Follow me on twitter at http://twitter.com/reddeermortgage
Join my Facebook group at http://www.facebook.com/?sk=2361831622#!/group.php?gid=262169230921
Thanks for reading!
Scott Bourke, AMP
Regional Mortgage Corporation