Mortgage Loan Insurance In Canada – This copy is for personal, non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients, or clients, or to inquire about permissions/licences, visit: www.TorontoStarReprints.com
OTTAWA – Canada Mortgage and Housing Corp. relaxes its criteria for insuring mortgages after the changes introduced last year were ineffective and led to a loss of market share.
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The Federal Housing Agency said Monday it is again taking into account gross debt service ratios of up to 39 percent and total debt service ratios of up to 44 percent for borrowers who have a strong history of managing their payments.
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Gross debt service refers to the maximum amount of gross annual income that can be used for home-related expenses such as mortgages, heating or housing benefits, while total debt service is calculated when these expenses are combined with monthly debt payments for things such as credit cards or cars.
The agency will also now require that at least one borrower or guarantor seeking insurance has a credit score greater than or equal to 600.
“We are taking this action because our insurance changes in July 2020 have not been as effective as we anticipated and we incurred the cost of a decline in our market share,” CMHC said in a statement.
Last July, the agency required a minimum credit score of at least 680 and capped gross and total debt service ratios at 35 and 42 percent, respectively, which is expected to reduce purchasing power by up to 11 percent.
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The measures were designed to protect home buyers, reduce government and taxpayer risk, and support housing market stability, while curbing excessive demand and unsustainable price growth during the pandemic.
CMHC’s decision to change its policy won’t have much of an impact on consumers because the change will target the insurance lenders get, said James Laird, co-founder of Ratehub.ca and president of mortgage brokerage CanWise Financial.
When CMHC tightened its standards, it said other options were available from rivals Sagen and Canada Guaranty.
“If a company has stricter insurance criteria than their two competitors, then the natural market starts to use the two competitors a lot more,” Laird said.
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CMHC declined to say who lost market share or how much of it was lost.
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Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Publication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star items, go to: www.TorontoStarReprints.com Mortgage insurance, also known as “mortgage risk insurance” or “CMHC insurance”, is a mandatory expense for homeowners who purchase a home with a down payment of less than 20% .
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It may seem like a simple question, but if you ask, “What is mortgage insurance?” you are sure to get more than one answer.
There are different types of mortgage insurance: namely a mortgage default insurance and a mortgage protection insurance. There are other types of insurance that can be helpful if you have a mortgage, such as life, critical, and disability insurance. Some types of mortgage insurance are mandatory, while others are optional.
Mortgage insurance offers no protection. It is designed to protect your lender in the event that you default – stop paying – your mortgage. Mortgage insurance is required when your down payment is less than 20% of the home purchase price, which is considered a high ratio mortgage.
The advantage of mortgage insurance is that you can buy a home even if they have less than 20% of the purchase price saved for a down payment. This makes the real estate market more accessible to Canadians.
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There are three mortgage insurers in Canada: Canadian Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty.
Your participation cannot come from borrowed money, but donations from family are allowed. The minimum deposit depends on the purchase price of your home.
Since mortgage insurance premiums are usually built into the mortgage loan, it also increases the cost of carrying the mortgage.
Although your mortgage lender technically pays the premium for this insurance, the costs are passed on to you. There is an option to pay the premium up front, but most people add it to their mortgage loan.
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Mortgage insurance premiums range from 0.60% to 4.50% and are calculated as a percentage of your mortgage amount. That percentage depends on your loan-to-value ratio, based on the size of your down payment.
You can get back up to 25% of your premium if you buy an energy-efficient home or renovate your home in an energy-efficient manner.
In Ontario, Quebec, Saskatchewan, and Manitoba, you must pay provincial sales tax (PST) on mortgage insurance premiums. PST must be prepaid along with your other closing costs as they cannot be added to your mortgage loan.
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While standard mortgage insurance will cover the lender if you don’t pay your mortgage, mortgage insurance will pay your mortgage in the event of death or disability.
Mortgage protection insurance policies, which are commonly sold to borrowers by their mortgage lender, reject the payout policy. This means that you can start paying premiums for benefits that cover your entire mortgage, but as you pay off your mortgage, your benefit drops even if you pay the same monthly premium.
Plus, because this type of insurance only covers your mortgage and nothing else, and is paid directly to your lender. Depending on your family’s needs, other insurance policies, such as life insurance, critical illness insurance, and disability insurance, may be similar options. These policies are more flexible and can save you and your beneficiaries more money than the mortgage cost. Your premiums may also be cheaper than mortgage insurance, depending on your health, age, and other variables.
Consult an independent insurance broker who is not affiliated with any particular insurance company to review your options.
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Aaron Broverman has been practicing personal finance for over a decade. His work has appeared on outlets such as Yahoo Finance Canada, Bankrate and Creditcards.com, Money Under 30, Wealth Rocket, CBC.ca and Greedyrates.ca. This former transplant to Toronto via Vancouver now lives in Waterloo with his wife and son.
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You will be fined for breaking the mortgage contract if you refinance before the end of the term. The potential benefit may be worth it.
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The Canada Greener Home Grant, along with other programs and incentives, can help you pay for upgrades and retrofits that make your home more efficient. The Canada Mortgage and Housing Corporation (CMHC) has rules for insured mortgages and the risks of insured mortgages are transferred from mortgage lenders to CMHC.
If you make a down payment of less than 20%, you will need to purchase CMHC insurance unless you choose a private mortgage lender or alternative private mortgage insurer. To mitigate their risk, CMHC changed the rules and minimum requirements to get a high percentage insured mortgage.
To learn more about the OSFI rule changes and the June 2021 stress test changes, please visit our mortgage stress test guide.
Effective July 1, 2020, CMHC introduced new underwriting policy changes to help manage risk by making it more difficult for buyers to qualify for a CMHC-insured mortgage. CMHC predicted that these new CMHC mortgage rules would reduce eligibility by 30%. These new CMHC rules were repealed on July 5, 2021.
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On July 5, 2021, CMHC relaxed its underwriting guidelines to join two Canadian private mortgage insurers. These changes:
At least one borrower must have a minimum credit score of 600. Previously, the minimum credit score was 680.
You can no longer borrow money for a down payment, so your down payment can only come from your own money or from a non-refundable gift.
Before July 1, 2020, non-traditional down payment sources, such as personal loans, were allowed for mortgages with down payments of 5% to 10%, provided the borrower had a minimum credit score of 650.
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Your debt service ratio (GDS and TDS) is a measure of whether you can pay your debt repayment and housing costs. The maximum allowable GDS and TDS ratios are lowered, reducing the maximum mortgage you can get.
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