Mortgage Default Insurance
For most Canadians, the hardest thing about buying a home – especially the first home – is saving the necessary down payment. Conventional mortgage financing which requires a 20% down payment can put home ownership out of reach for most Canadians.
Fortunately, real relief came in 1954 when the government introduced significant changes to both the National Housing Act and the Bank Act which would increase the supply of mortgage funds available.
By providing default insurance to financial institutions, also know as mortgage loan insurance, home buyers today can arrange financing up to 100% of the property’s value. Lenders refer to this as a 100% Loan-To-Value Ratio (LTV). Hence, any financing beyond the conventional 80%, which requires default insurance, is referred to as, high-ratio financing.
There are currently four mortgage insurance companies in Canada:Canada Mortgage and Housing Corporation (CMHC)
PMI Canada ( as of April 26, 2007 )
The purpose of the insurance offered by these companies is to indemnify the lender in the event of borrower default. However, it is the borrower who pays for the insurance.
What is the cost of insuring the loan?
Mortgage loan insurance is expensive. A one-time premium is paid by the borrower on the total amount of the mortgage and not just on the portion exceeding 80% of the purchase price, the high-ratio portion that is at risk. Depending on the size of your down payment, the insurance premiums range from 1.00% to 3.10% of the total amount of the loan.
The premium can be paid in one lump sum at the time of purchase, or it can be added to your mortgage and included in your monthly mortgage payment. If you do the latter, you’ll end up paying a good deal of interest on the premium. To that end, it is worth comparing high-ratio financing to your alternative: a first mortgage for 80% of the purchase price and a second mortgage for the high-ratio portion. This eliminates the need for default
insurance. If you contact our office we will gladly help you determine the best choice for your situation.
One advantage to this type of financing is that insured mortgages become open after three years. That is, you can pay off your mortgage by paying a 3 month interest penalty regardless of the lenders policy.
What homes qualify for mortgage loan insurance?
Virtually every type of home qualifies: new homes or resale homes which include town homes, detached homes, semi-detached homes, condominiums, single and multiple wide mobile homes constructed to CSA Standard Z-240 and single and multiple wide modular homes constructed to CSA Standard A-277. In the case of manufactured homes, they must be situated on land that you own or lease.
100% financing program(s)
All four of the insurance providers listed above offer default insurance to lenders at the 100% financing level, or LTV. Each of them has come up with their own unique names associated with their respective programs. There is very little difference between insurance companies with respect to the 100% financing programs they offer and the premiums are the same. Therefore, we have provided an overview of CMHC's two programs below to give you the general flavor of this type of program. Listing all three company's programs would be too repetitive.
CMHC has two programs for 100% financing:
CMHC Flex Down
CMHC Flex Down provides borrowers with the opportunity to purchase their own home sooner by using a wider range of sources for a down payment. The CMHC Flex Down product is intended to appeal to homebuyers who may lack, or have made the financial decision not to provide, a traditional 5% down payment from their existing resources but who have a good credit history and sufficient income to support the financial obligations of homeownership.
CMHC Flex 100
CMHC Flex 100 offers financing up to 100% of a home’s value on purchase transactions (including portability) to borrowers with a proven track record of managing their debt and the financial capacity to repay the mortgage.
The following table provides more details on each of these programs: