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Understanding Mortgage Insurance and CMHC

Do I really need mortgage insurance?

A down payment serves as a form of security– so the larger your down payment, the better. If you have a greater amount of equity built up in your home, unforeseen circumstances may be managed easier, and you’ll be less likely to default on your mortgage.

Lenders commonly group low mortgage rate shoppers that have a deposit between 5– 20 percent of the home purchase price into the “slightly higher risk” category. In order for the lender to protect against this increased risk, mortgage default insurance is required.

Best mortgage rate shoppers used to be able to secure 100 percent financing in Canada until October 2008 when the government stopped insuring zero down payment mortgages in an attempt to prevent a U.S. style housing crisis.

What is Mortgage Default Insurance?

Default Insurance, also referred to as mortgage loan insurance, offers protection to the mortgage lender. The lender generally requests this form of insurance for mortgage loans with a down payment of less than 20 %.

As of July 9, 2012, any Canadian mortgage rate requiring default insurance is capped at an amortization period of 25 years. This means 30-year mortgages are only a possibility for those placing more than 20 percent down (known as a conventional mortgage).

In the event that you default on your mortgage, the lender will go through the process of collecting the outstanding amount on the loan. If the outstanding loan is still not completely paid off after selling the home, then the insurer will likely provide the difference back to the lender.

Where do I get Mortgage Default Insurance?

This type of insurance is supplied by the government organization Canadian Mortgage and Housing Corporation (CMHC), along with private insurers.

What Will it Cost Me?

When the lender insures the loan, they transfer the insurance premium to the homeowner. The premium is a percentage of the mortgage value based on your Loan-to-Value ratio (LTV). This premium may be paid in a single lump sum or it can be included in your monthly mortgage payments. To calculate your Loan-to-Value ratio, take the mortgage amount and divide it by the property value.

Advantages of Having Default Insurance

It is a win-win situation for both the lender and potential homeowner as the insurance protects the lender and the borrower. The lender is able to provide the same great mortgage products and rates to borrowers that are at a slightly higher risk of default.

Disadvantages of Having Default Insurance

Default Insurance helps make it possible for a homeowner to buy a property with a lower down payment– this indicates they have little value in their home and they will end up paying even more interest on the home loan. If the homeowner would like protection they will need to purchase additional mortgage insurance.

Why Your Down Payment Matters

Is it actually that big of a deal?

All lenders assume that you will put some money down on your home purchase. The minimum down payment in Canada is 5 % of the purchase price. The amount of insurance expenses charged is relative to your best mortgage rate and your down payment amount. So keep in mind, the more cash you are able to save and put towards your down payment, the lower your mortgage monthly payments are going to be.

Down Payment Due Diligence

This ends up being considerably crucial if your credit history is less than spotless. Some lenders will likely disregard previous credit blemishes, not confirm earnings and various other financial conditions, if you have 35 % to 40 % of the purchasing price available upfront as part of your down payment.

What you may not know about your down payment is that this equity goes to the banks in the unfavorable event of foreclosure. For this reason, the bigger the down payment the more protection the banks have. Make sure to have your down payment available at least 30 days prior to applying for a mortgage loan.

Ways to Accumulate a Down Payment

If you have already spoken with low mortgage rate lenders and they have notified you that your down payment is not quite enough, make it a top priority to find a way to save your money such as postponing a brand-new vehicle or a vacation.

If you have sufficient equity in your RRSP, you are able to get a loan from this investment account in order to help improve your down payment. Canadians are allowed to borrow as much as $25,000 from an RRSP. In addition, down payment funds can be borrowed from a secured line of credit or can be given from a family member.

Why do Mortgage Rates Change?

Understand why rates change and how you can adapt to increases.

There are many factors that influence the health of the economy: unemployment, inflation, consumer confidence, and the housing market are just a few. Let’s take a look at the ways these factors are able to impact your mortgage rate.

Factors Affecting: Fixed Mortgage Rates

A fixed best mortgage rate usually moves in alignment with government bond yields of the same term.

Bond Prices and Bond Yields (Negative Relationship)

When bond prices increase, bond yields decrease, and when bond prices decrease, bond yields increase. Bonds are typically considered safer investments than stocks.

Bond Yield: the return an investor will receive by holding a bond to maturity.

Bond Yields and Fixed Rates (Positive Relationship)

Typically fixed rates have a positive relationship with bond yields. They increase and decrease together with bond yields.

Stock Market is Booming– Bond Prices Decrease, Bond Yields Increase, Fixed Rates Increase

Whenever the stock market is booming, investors are far more likely to make a higher return on investing in equities (i.e. the stock market) than investing in bonds. Thus the demand for bonds decreases, meaning that the price of bonds decreases, and the bond yield increases. Therefore, fixed rates will likely increase.

Stock Market is Dipping– Bond Prices Increase, Bond Yields Decrease, Fixed Rates Decrease

When the Canadian economy becomes less stable, investors generally have the tendency to invest in safer financial commitments such as bonds.

Factors Affecting: Variable Mortgage Rates

The overnight rate changes the cost of lending/borrowing short-term funds and therefore affects the Prime Canadian mortgage rate. The Bank of Canada regularly updates this rate based on economic conditions.

A Few Things to Ask Your Mortgage Broker

There are no silly questions.

Listed below are a variety of questions to think about when speaking to your mortgage broker:

How long have you been working in the mortgage industry?

Years of experience is essential when it pertains to taking care of challenging mortgages.

What type of education or licensing do you have?

You need to confirm that your mortgage broker is licensed by consulting the Canadian Association of Accredited Mortgage Professionals.

On what do you base your suggestions?

You should make sure that they are providing recommendations for the right reasons. A mortgage broker works for you, and nobody else.

Are there any special conditions that apply to this deal?

Bear in mind any undisclosed costs or unfavorable conditions attached to a no-frills low mortgage rate.

What fees/costs are connected with the rate you have estimated me?

Do not let concealed costs creep up on you. Regularly ask your mortgage broker to break out any charges and fees so you are appropriately notified.

Can I please see the lender’s letter of commitment?

If you are assured a certain rate, be sure to request a letter from the lender verifying that the reviewed rate is undoubtedly locked in.

What is your area of expertise?

Brokers typically facilitate more loans of one form than another. If you are purchasing a home, make certain you are dealing with a residential expert.

Are you affiliated with any mortgage associations?

Membership to some mortgage associations can possibly be a sign of the broker’s oath to provide the best Canadian mortgage rate available.

Can you provide me with references?

Ask for names of current clients or real estate agents with whom they have actually worked.

A combination of extensive research and appropriate inquiry should certainly assist you to narrow down your pool of prospective mortgage brokers for the best mortgage rate.

What are Blended Mortgages?

Blend your mortgage to improve your rate.

Quite a few people are wondering how to lower their current mortgage costs.

Generally, the mortgage penalties you incur to break your mortgage are set up as the greater of three months interest or the value of your Interest Rate Differential. If you’re going to break your mortgage, try and do it when your mortgage is sitting in the “sweet spot”– this is when your rate is not high enough to trigger IRD and thus you’re only required to pay the three months interest penalty.

Unfortunately, the sweet spot rarely comes at a convenient time. Also, most people will have trouble ever fitting into this scenario if their rate is over 4 %. If this is your situation, speak with your low mortgage rate planner about a blended mortgage. There are two options that most banks will offer:

Blend and Extend or Blend to Term

Under a Blend and Extend option, the bank will give you a brand new term at the current rate but ‘blend’ in your penalty to your new rate.
The Blend to Term option is the same idea but your term remains as is. For example, you would end up with the same two years left but at a lower rate with the penalty blended in.

If you are in that “sweet spot” a good Canadian mortgage broker will show you calculations on just how much you can save by breaking your best mortgage rate. If you’re subject to an IRD, a good planner will go over what blended options are available to you and take into account your time frame and overall goal to help you select the option that’s the best fit.

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