Seven Common Questions about Default Insurance.
October 9, 2018 | Posted by: Eric Palmer
Answering seven common questions from homebuyers about
Canada's mortgage loan insurance market
James Bombales Sep 10, 2018
Obtaining mortgage loan insurance is mandatory for homebuyers in Canada who put between 5 and 19.99 per cent for their down payment towards a new home or condo. While it's ideal to put at least 20 per cent down in order to avoid these costs, home prices in cities throughout Canada are rising faster than many homebuyers can save making it difficult to reach that 20 per cent goal. Access to mortgage loan insurance allows homebuyers to put less than 20 per cent down, bringing the dream of homeownership within reach. The premiums can either be paid up front in a lump sum or incorporated into an applicant's mortgage loan payments.
To help prospective homebuyers learn more about mortgage loan insurance and how it works, we've compiled a list of the top seven need-to-know questions with the help of Monica Guido, Client Relations Manager at the Canada Mortgage and Housing Corporation (CMHC).
The Department of Finance determines the rules governing mortgage insurance and requires it when homebuyers have a down payment of less than 20 per cent of the purchase price of a home or condo. Mortgage loan insurance is very different from mortgage life insurance or mortgage protection insurance. It protects the lender in the event that a borrower cannot make payments and defaults on their loan whereas mortgage life insurance protects the borrower in the event that they become seriously ill or die unexpectedly.
'A common misconception is that mortgage insurance protects the consumer,' says Guido. 'Because the consumer is paying for something they automatically feel that they are the recipients of the protection but it actually protects the lender and the cost is transferred to the borrower.'
The Canada Mortgage and Housing Corporation (CMHC), Genworth, and Canada Guaranty are the three providers of mortgage loan insurance in Canada. The main difference is that CMHC is a Crown corporation of the Government of Canada while the latter two are private companies. The cost of insurance and lending guidelines are generally the same across the board, however providers may offer certain rebates such as discounts for energy efficiency, so it's important to look at the products available from all three.
The maximum purchase price or property value must be below $1,000,000. Homebuyers should note that the minimum down payment also differs depending on the price of the home.
'If the home costs $500,000 or less you would need a minimum down payment of five per cent,' says Guido. 'If the home costs more than $500,000 you would need a minimum of five per cent down on the first $500,000 and 10 per cent on the remainder.'
With average home prices, taxes and the cost of living rapidly increasing in many urban areas across Canada, saving 20 per cent for a down payment could take years or even decades depending on where you live. In many cases, the longer you wait to save, the higher the price of the home and the required down payment that goes with it. Mortgage loan insurance allows homebuyers to purchase a home or condo with as little as 5 per cent down while giving them access to lower interest rates.
'Mortgage insurance protects lenders against borrower default thereby reducing risk,' says Guido. 'As a result, it encourages lenders to provide financing options to homebuyers at interest rates comparable to buyers with a larger down payment.'
The premium for mortgage loan insurance depends on the amount of your down payment. The closer you are to 20 per cent, the lower your premium will be. The current rate ranges from 2.80 per cent for down payments of 15 to 19.99 per cent, up to 4.0 or 4.5 per cent for down payments of 5.0 to 9.99 per cent.
'Mortgage insurance premiums are determined by the homebuyers' down payment as a percentage of the purchase price,' explains Guido. 'Those with a down payment of less than 10 per cent of the purchase price, the cost is 4 per cent of the loan amount. The premium rises to 4.5 per cent of the loan amount for homebuyers with borrowed down payments.'
Like any insurance product, applications for mortgage loan insurance can be declined. Insurance providers will look at several factors to assess the borrower's ability to repay their loan, including the loan amount, the property being purchased, their income, credit history and credit score.
'If we don't feel confident that the borrower fits within our risk guidelines, we will not proceed with the application,' says Guido. 'These risk guidelines are what we call Gross Debt Service (GDS) and Total Debt Service (TDS). These ratios look at the percentage of their monthly household income that covers their housing cost and the percentage of their monthly income that cover housing costs plus any other debts.'
All three insurance providers offer assistance programs for those at risk of defaulting on their mortgage payments as a result of financial difficulties or an unforeseen life event. Genworth's Homeowner Assistance Program works with clients to establish alternative arrangements such as partial, shared or deferred payment plans. Canada Guaranty has a Homeownership Solutions Program that offers options like loan or agreement modifications that include reducing the contract rate to reflect the current interest, should they be lower. CMHC also offers solutions for homeowners experiencing temporary financial difficulties including altering payments or amending the amortization period.
'Our Default Management Program will work closely with the lender to work with the client and find a way to help them get out of their financial distress,' says Guido. 'Every scenario is different based on the client's needs but it gives us that opportunity to work with the lender in order to establish a good relationship with the client and ensure that they are supported.
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