How high ratio mortgage insurance could impact your home purchase
What is a high ratio mortgage?
A high ratio mortgage is a mortgage that has been insured by one of the three mortgage insurance companies in Canada; CMHC (owned by the Government of Canada), Genworth and Canada Guarantee. These insurance providers charge a fee that is added to your mortgage. This is required by when purchasing a home with a down payment that is less than 20% of the purchase price.
What is a conventional mortgage?
A conventional mortgage is a mortgage with a down payment of more than 20% of the total purchase price. These may be insured by one of the above insurers at the lender’s expense, however, borrowers are rarely aware of this unless they’ve inquired directly with their lender. In this instance, there is no cost to the borrower for this insurance. If the bank were to insure the mortgage, the purpose would be to increase their security on the mortgage therefore further increasing the bank’s ability to raise further funds in the market based on this security.
How does this affect the borrower?
If the mortgage is insured, the borrower must qualify based on the insurer’s list of qualification criteria. The main points (but not all) are:
- Maximum purchase price of $1,000,000.
- Minimum down payment of 5% of the first $500,000 and 10% thereafter.
- Maximum amortization period of 25 years.
- Must qualify at the benchmark rate set by the Canadian government.
What are the premiums for a high ratio mortgage?
- 5% – 9.99% down payment = 4% of the mortgage amount
- 10% – 14.99% down payment = 3.1% of the mortgage amount
- 15% – 19.99% down payment = 2.8% of the mortgage amount
- 20% down payment or more = Insurance is no longer required.
There are also additional premiums for specialty programs such as the Stated Income Program where the borrower is not qualifying based on conventional income verification.
How does a borrower avoid these premiums?
As per the Bank Act, these premiums are required for anyone with a down payment of less than 20% of the purchase price.
Are premiums paid out of pocket?
Borrowers have the option of paying the Insurance Premiums upfront in cash, but most people have the premiums added into the mortgage so that there is no up-front cost.
How many insured mortgages can a person have?
CMHC will only allow borrowers to have one CMHC insured mortgage. If the borrower has owned their CMHC insured property for a while and now has a 50% loan to value ratio, they still cannot get another CMHC mortgage. Unless the borrower refinances to remove the CMHC insurance, they are still considered to have an insured mortgage with CMHC. Canada Guarantee and Genworth both allow up to two insured mortgages. In total, borrowers are typically capped at a maximum of three insured mortgages.