To begin, separate from mortgage life insurance or home, property, fire and casualty insurance, mortgage insurance provides protection to the institution as a lender in the event of a default by the borrower.
If the amount of the mortgage exceeds 80% of the lending value of the mortgaged property, the mortgage is considered a “high loan-to-value” OR “high ratio” loan and therefore subject to “be a perceived risk”. Accordingly, and as required by law, mortgage insurance must be purchased for the full amount of the mortgage (not the full amount of the purchase price). Mortgage insurance is available from Canada Mortgage and Housing Corporation (CMHC) a federal crown corporation, ant two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company. and it is generally the institutional lender who will choose between the 3 and make the application. The premium is subject to PST 8% tax which is required for payment at time of closing.
The Government backs 100% of the mortgage insurance obligations of CMHC, in the event that it is unable to make insurance payouts to lenders. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders (when unable to make insurance payouts to lenders), subject to a deductible charged to the lender equal to 10% of the original principal amount of the loan.
An application fee and an insurance premium (which can be added to the mortgage amount) are due to the insurer.
In some cases an institution may require a mortgage to be insured even if the loan-to-value ratio is less than 80%. For example, the bank may require insurance as a condition of the loan if the property is considered higher risk (e.g. the home is in a highly volatile real estate market, or may be difficult to resell).
EFFECTIVE October 17, 2016: All insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate OR the Bank of Canada’s conventional five-year fixed posted rate. The Bank of Canada’s conventional five-year posted mortgage rate is available on the Bank of Canada’s website ( www.bankofcanada.ca/rates/daily-digest/ ). The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay.
Lenders and mortgage insurers assess two key debt-servicing ratios to determine it a homebuyer qualifies for an insured mortgage:
Gross Debt Service (GDS) ratio – the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;
Total Debt Service (TDS) ratio – the carrying costs of the home and all other debt payments relative to the homebuyers income.
To qualify for mortgage insurance, a homebuyer must have a GDS ratio NO greater than 39% AND a TDS ratio NO greater than 44%. Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to continue servicing their debts even in a higher interest rate environment, OR if faced with a reduction in household income.
NOTE: Homeowners with an existing insured mortgage or those renewing existing insured mortgages are NOT affected by this measure.
Federally regulated financial institutions cannot provide government-backed insurance on properties at $1.0 MILLION or higher.
EFFECTIVE April 6, 2020: A new Benchmark Rate for insured mortgages will replace the Bank of Canada 5-Year Benchmark Posted Rate in determining the minimum qualifying rate (stress test).
The new Benchmark Rate will be:
- The weekly median 5-year fixed insured mortgage rate as calculated by the Bank of Canada from federally-backed mortgage insurance applications adjudicated by mortgage insurers; plus
- A buffer of 200 basis points to be set by the Minister of Finance upon the coming into force.
- The Benchmark Rate will be published on a Wednesday and come into effect the following Monday.
The minimum qualifying rate for insured mortgages will now be the greater of:
- The borrower’s contract rate, which is the mortgage interest rate agreed to by the lending institution and the borrower; or
- The new Benchmark Rate.
The new Benchmark Rate will be more responsive to market conditions by tracking the actual mortgage rates offered by lenders at the application stage. These rates have been shown to be consistent with final mortgage contract rates. Using the application data allows for more timely data to be published.
The new Benchmark Rate for insured mortgages will be published weekly on the Bank of Canada’s website, and will be based on submitted mortgage insurance application contract rates.
The new Benchmark Rate for insured mortgages will be published at two decimal places. If, on any given week, there are any delays in updating the new Benchmark Rate, the previous week’s published Rate will stand until a new Rate is published.
Links to CMHC Resources
CMHC Enhances Flexibility in Mortgage Amortization and Eliminates Application Fees
Effective as of March 31, 2018
|Loan Amount as a % of the Value of the Home (LTV)||Premium on Total Loan||Premium on Increase to Loan Amount for Portability and Refinance *|
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||1.70%||5.90%|
|Up to and including 80%||2.40%||6.05%|
|Up to and including 85%||2.80%||6.20%|
|Up to and including 90%||3.10%||6.25%|
|Up to and including 95%||4.00%||6.30%|
|90.01% to 95% – Non-traditional down payment||4.50%||6.60%|
NOTE: The amortization cannot exceed 25 years for CMHC insured mortgages.
Premium Surcharges apply on the following:
- Progress Advance: 0.50%
- Standard Variable Rate Mortgages (VRM’s): 0.25%
- 30 Year Amortization: 0.20%
- 35 Year Amortization: 0.40%
- Extended amortizations are not available for CMHC Line of Credit (LOC), Flex Down, or Refinance products.
- Blended Amortization for Refinance and Portability: 0.50%*
- Secured Line of Credit:
Non-Amortizing Repayment Option: 5 years (5/20) 0.25% 10 years (10/15) 0.50%
* For Portability and Refinance, the premium is the lesser of the premium on the increase to the loan amount or, the Purchase premium on the total loan. In the case of Portability, a premium credit may be available under certain conditions to reduce the Purchase premium.For most people, the hardest part of buying a home – especially a first home – is saving the necessary down payment. If a buyer has less than 20% of the purchase price to put down, a lender will require mortgage insurance as protection against any payment default. Homebuyers with CMHC Mortgage Loan Insurance can purchase a property with as little as 5% down. Since CMHC introduced the Mortgage Loan Insurance in 1954, they have helped one in three Canadians obtain financing for their homes. Mortgage insurance also helps landlords and developers access low-cost financing which helps ensure a supply of affordable rental units.
NHA Mortgage-Backed Securities have been available to the financial marketplace since 1987, and have become an integral part of the financial system – as an attractive, real estate-based investment offering both high yields and maximum security, and as a source of financing for the Canadian housing industry.
Want to learn more?
Visit CMHC website at www.cmhc.ca
Contact us for professional advice concerning mortgage insurance.