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MORTGAGE INSURANCE INDUSTRY FACTS AND TERMS
What is mortgage insurance, also known as mortgage default insurance?
• In Canada, mortgage insurance is required under the Bank Act for
those homebuyers making less than a 20 per cent down payment on a property.
• Mortgage Insurance is different from life or disability insurance. Mortgage insurance transfers the risk of default from
the lender to the mortgage insurer.
• Mortgage insurance opens the door to homeownership for borrowers with a down
payment of less than 20 percent.
• Mortgage insurance enables borrowers to receive the great low mortgage interest
rates as buyers with down payments of 20 per cent or greater.
• Lenders arrange mortgage insurance on the homebuyers’ behalf.
• Genworth Financial Canada and CMHC provide the majority of mortgage insurance in
Canada.
“High Ratio” mortgage
• “High ratio” mortgages, sometimes referred to as “low-down payment” mortgages, are
those where the buyer has less than a 20 per cent down payment.
• The previous threshold was a 25 per cent down payment. Federal legislation recently
reduced it to 20 per cent. It is sometimes referred to as great than 80 percent mortgage financeing
• High ratio mortgages comprise almost half of the Canadian mortgage market, or
approximately 450,000 mortgages in 2006.
• 95 per cent of Canadian high ratio mortgages are “prime” mortgages.
“Sub-prime” mortgage
• These mortgages, more common in the United States, are not the same as a high ratio
mortgage.
• A “sub-prime” mortgage is a mortgage to an individual who has recently experienced
significant credit problems.
• It is not based on the purchaser’s down payment nor is it based on the purchaser’s
employment type.
• “Sub-prime” mortgages represent about 5 per cent or less of the Canadian mortgage
market. They comprise about 20 per cent of the U.S. market.
Option ARMs (Adjustable Rate Mortgage) in the U.S. sub-prime market
• The Canadian mortgage market does not offer Option ARMs, as has been the case in
the U.S. sub-prime market.
• Option ARMs involve a considerable payment variation based on changes in the
interest rate. The introductory rate on an Option ARM can rise a maximum of 6
percentage points, meaning that a buyer with a starting rate of 6 percent could end up
with a mortgage rate of 12 percent.
Benefits of an insured high ratio mortgage
• Many first-time homebuyers rely on high ratio mortgages, which allow consumers to
build equity in a home sooner when they have a small down payment.
• An insured high ratio mortgage is the least expensive way for new homeowners to
enter the market – eliminating the need for an up-front investment of a 20 per cent
down payment or greater.
• If homebuyers are able to make a larger down payment, they may still choose a high
ratio mortgage, which will enable them to consider utilizing the unused down payment
amount for immediate home improvements, an education fund or other investments.
• Mortgage default insurance works by transferring the homeowner’s risk of default from
the lender to the mortgage insurer. This benefits homebuyers by allowing them to
obtain loans at lower interest rates than would otherwise be charged if lenders retained
the risk of default.
• The portability feature on mortgage insurance allows homeowners to transfer their
original insured mortgage to a new property resulting in significant savings to the
homeowner by avoiding the cost of a new mortgage insurance premium.
My Mortgage BC.com is a lender in the Canadian mortgage market that specializes in high ratio mortgages. We have over 20 years of experience. A quick call to us could save you thousands on your next mortgage. |
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