I have had a lot of questions lately on mortgage insurance. Here is everything you need to know on mortgage default insurance: what it is, who provides it, why you need it, and how to switch your insured mortgage to get the best rate.
Although most of us are familiar with the idea of taking out a mortgage, very few people tend to give much thought to the next step. This may help to explain, at least in part, why so many people seem to be dissatisfied with their mortgage rates. In this blog you will learn a little bit more about what mortgage default insurance is, why you need it, and hopefully gain some insight about how a switch can benefit your bottom line.
ATRINA, WHAT’S MORTGAGE DEFAULT INSURANCE ANYWAY?
In Canada, mortgage default insurance is a mandatory type of insurance for anyone unable to make a down payment of at least 20% under fully income qualified programs. Mortgage insurance is there to protect the lender in the event that the borrower defaults on the loan payments (the mortgage). Despite what many people think, you do not need to be a first time home buyer to take advantage of putting less than 20% down. As long as the home is owner occupied, or used as a second home and not a rental property, you can purchase with less than 20% down and have the insurance added to your mortgage.
WHO PROVIDES MORTGAGE DEFAULT INSURANCE IN CANADA?
Canada has three major mortgage default insurance providers:
- The Canada Mortgage and Housing Corporation (CMHC)
- Genworth Financial
- Canada Guaranty
CMHC is a crown corporation and the other two are privately held. The insurance premiums are the same across the board. Sometimes each provider offers a special or a kickback and the borrower can request to go with that specific insurer.
DOES THE TYPE OF MORTGAGE I HAVE AFFECT MY RATE?
Short answer — yes. The mortgage rate you receive will depend on which category of mortgage you belong to (stay with me here!).
Essentially, there are 3 main categories of mortgages:
INSURED: You put down less than 20% for a down payment and in paying your insurance premium the loan-to-value (LTV) is > 80% meaning your loan is higher than 80% of your purchase price.
INSURABLE: You have put down more than 20% for a down payment and you do not need to have the insurance premium. In this case, the lender can choose to pay the insurance premium at no cost for you, or, you can choose to pay the insurance premium yourself depending on the lender to get the lower rate. Either way, because your mortgage will be considered insured, you will get the best rates. One thing to keep in mind with this is that the mortgage still has to meet insurer guidelines. (Owner occupied, maximum amortization 25 years, and the purchase price has to be less than one million dollars).
UNINSURABLE: You have put down more than 20% for a down payment and you do not need an insurance premium, but you ALSO cannot be bulk insured (as with an insurable mortgage) as you don’t fit the insurer guidelines. Examples of those who fit this profile are refinances- when you are taking equity out of your house, purchases over $1 million, 30-year amortization, and single home rentals. One reason many people choose a longer amortization is simply to lower their monthly payments. The longer you have to pay back your mortgage, the smaller your payments will be. Some people don’t have the luxury of going with a shorter amortization as you also qualify for less mortgage.
CAN I SWITCH MY INSURED MORTGAGE?
After the stress test came into place, homeowners that had refinanced their mortgage were not allowed to switch to a new lender for a better mortgage rate without having to re-qualify under the new guidelines. Fortunately, things have changed April 2018 giving homeowners looking to switch/renew their mortgage more options.
A FLICK OF THE SWITCH
If your home was purchased or refinanced BEFORE November 30, 2016, the chances are very good that I would still be able to find you an insurable rate. The upside to this is that it allows you to make the switch under previous guidelines, saving you money by locking in a better rate; an insurable rate which are almost always lower than the non-insured rate.