First of all, what exactly is an insured mortgage?
An insured mortgage loan is basically any bank or institutional residential mortgage where the mortgage amount is higher than 80% of the property value.
The Canadian bank act requires that most lenders under their jurisdiction only approve residential mortgages up to 80% loan to value and if a higher mortgage amount is to be considered, there must be mortgage insurance in place.
So effectively, the applicant needs to then qualify for both a home mortgage and home mortgage insurance due to the fact that each component is provided by a different financial institution.
Mortgage insurance is not to be confused with mortgage life insurance which is a totally separate type of insurance and is designed to retire or pay down the mortgage in the event of the passing of the mortgage holders.
Mortgage insurance basically provides a guarantee to the lender that the mortgage will be repaid in full in the event of default provided that the mortgage lender has complied with all the terms and conditions of the insurer.
The main provider of mortgage insurance in Canada is CMHC, or Canada Mortgage And Housing Corporation. CMHC is a crown corporation that provides mortgage insurance products for a number of different applications with the main programs centered around single family residential homes.
There are also private insurance companies Genworth and Canada Waranty, which provide competitive programs to CMHC in mostly urban areas. The private insurers do offer insure to rural and more remote locations, but don’t tend to be as competitive with CMHC in those situations.
As a crown corporation, CMHC has a mandate to help provide all Canadian with the opportunity to become home owners, so their programs effectively are available anywhere in Canada.
The two most common situations where mortgage insurance comes into play is when a home purchase or mortgage refinancing requires a mortgage over 80%.
In the case of a home purchase, the maximum amount that can be financed under an insured program is 95% loan to value. For mortgage refinancing, the maximum used to be 95% as well, but was dropped to 90% in 2010, reduced to 85% loan to value in March of 2011, and dropped still further to 80% loan to value in July of 2012.
For a home purchase, you can still finance the remaining 5% minimum down payment from another source of debt. But in order for that to be a workable strategy, you’re going to have to meet the debt servicing requirements on all debt for both the mortgage lender and the mortgage insurer.
Mortgage insurance is based on the percentage of mortgage taken and the application status of the applicant. There are different rate schedules for employed and self employed individuals with the rates for self employed being slightly higher than employed.
As the mortgage loan to value increases, so does the insurance premium, ranging from 1/2% at the low end to over 5% at the high end.
The insured mortgage insurance premium is going to be the responsibility of the borrower and can be paid in one lump sum payment or paid over time by being added into the monthly mortgage payment.
There are ways to potentially reduce the mortgage premium such as through building an energy efficient home design that is accepted by the CMHC insurance program.
If you’re looking to purchase a home or refinance an existing mortgage where the loan to value ratio is going to be greater than 80%, then an insured mortgage may be a requirement to getting financing.
In order for you to better understand and effectively work through all the rules and requirements of both the mortgage insurance companies and various residential mortgage lending programs that support insured mortgages, I recommend that you give me a call so I can assess your situation and requirements and spend the time necessary to work through all the options available with you.