All about mortgage loan insurance

The  following article by the Canadian Mortgage and Housing Corporation explains what mortgage insurance is and who needs it.

What Is Mortgage Insurance?

Mortgage insurance protects the lender against payment default by the  homebuyer. Most financial institutions require it where the homebuyer has less than 25 per cent of the purchase price as a down payment.

What Are the Benefits of Mortgage Insurance?

By providing mortgage loan insurance to lenders, CMHC enables homebuyers to access mortgage financing with as little as 5% down and at interest rates typically reserved for homebuyers with a down payment of 25% or more. The cost of mortgage insurance is generally more than offset by the savings the borrower gets from lower interest rates.

For example, a current rate for a 3-year term on a CMHC-insured mortgage is around 4.5%, while a borrower with a good credit history would typically be offered a rate in the order of 7% with an administrative fee of around 3.25% (added to the mortgage) for an un-insured mortgage. Accordingly, a $120,000 CMHC insured loan at 95% of the property value would see a monthly payment in the order of $682 while the same loan and borrower with an uninsured loan would have monthly payments of $868, saving the borrower in this instance over $180 per month. The $18 per month effective cost of mortgage insurance is clearly value add. Equally important, a CMHC insured mortgage ensures that the borrower will obtain the most competitive rate at each term renewal since the insurance covers the full life of the mortgage, typically 25 years.

Rental mortgage insurance also benefits renters because it allows rental property owners to have larger loans at lower interest rates than would otherwise be available. For example, on a rental property mortgage of $5M, at 85% of value, the typical rates for this loan on a 5 year term are currently 5.25%, while the uninsured rates would be in the order of 6%. All else equal the CMHC insured mortgage would save the borrower in this example upwards of $26,328 annually.

How are Insurance Premiums Determined for Each Mortgage Loan?

The premium paid for mortgage loan insurance is based on the amount of the loan in relation to the value of the home and is normally added to the mortgage balance.

What Mortgage Insurance Choices are Available?

Ongoing enhancements to the mortgage loan insurance products and policies make it easier than ever for Canadians to finance their homes. CMHC mortgage insurance products have continued to meet the changing needs of Canadians. For example, some of the recent innovations announced by CMHC include:

• expanding the sources of down payment for borrowers with demonstrated financial abilities through its new Flex Down
  Product in order to address an existing barrier to achieving homeownership;
• improving access to all of CMHC's homeowner mortgage insurance products for self-employed Canadians , thus assisting this important and growing segment of the Canadian economy to access affordable housing finance;
• recognizing the evolving lifestyle needs of Canadians who wish to purchase a second home as a result of career or family decisions by allowing qualified borrowers to use any of CMHC's existing homeowner products when they purchase or
  refinance a second home and;
• helping meet Canada’s climate change objectives and supporting healthy, sustainable communities by announcing a 10 per cent refund on CMHC’s mortgage insurance premiums when a  borrower buys or builds an energy-efficient home or makes energy-saving renovations. This same premium rebate is also available for rental development and energy retrofits.

Where Do CMHC’s Profits from Mortgage Insurance Go?

Consistent with direction set by the Office of the Superintendent of financial Institutions for private sector insurers, CMHC maintains sufficient reserves for anticipated future claims as well as sets aside capital funds for unanticipated future claim liabilities and serious adverse market conditions. In this way it ensures it remains viable and fully self-sufficient and therefore does not have to rely on government to support it in less favorable economic times. This reserve is included  in the Government of Canada’s financial statements as an asset and, accordingly, has served to reduce the overall federal deficit.

How Can You Find Out More Information About CMHC?

Visit CMHC’s web site www.cmhc.ca to obtain more information about CMHC`s products, services and publications or call CMHC at 1-800-668-2642.