 TIP #14
What Is Mortgage
Loan Insurance?
Conventional vs. High-Ratio
In Canada, any mortgage for more
than 75% of the purchase price of a home (called a
"high-ratio" as opposed to a "conventional" loan)
is required to carry mortgage insurance, through
either the Canada Mortgage and Housing Corporation
(CMHC) or the private GE Capital Mortgage Insurance
Corporation, on the full amount of the loan. The
insurance is arranged when you apply for the loan,
and protects the lender against default by the
borrower.
The Cost
The insurance premium can range from .5% to 3% of the
amount of the loan, based on its overall riskiness,
and can be paid up front or added to the loan principal
and paid off over time (more expensive over the long
run).
In addition, there is an application fee:
you can choose to pay $75 plus the cost of a
bank-arranged appraisal, or $235 including the cost
of a CMHC determination of property value. (NOTE:
first-time buyers in particular should, as part of
their mortgage-shopping, ask whether the lender will
waive any part of the application fee: I've been
offered a $175 reduction over the phone!)
95% Financing
Though the expense of loan insurance is significant, it
has made home ownership possible for many
Canadians - 2.7 million of them - with down payments
of less than 25%.
How much less? A "regular" insured mortgage can go as
high as 90% of the purchase price. But under certain
circumstances, you may qualify for First Home
Loan Insurance (FHLI), involving up to 95% financing
(based on either the purchase price or the appraised
value of the house, whichever is less).
Current FHLI criteria (which can change, so check with
CMHC or your lender) include:
- at least one of the purchasers can't have owned
a home in Canada in the last five years;
- monthly interest, principal, tax and heating
costs (and half of condominium fees) can't be
more than 32% of your gross monthly income, and
your TOTAL monthly debt payments (ie., adding
in car payments, VISA, etc.) can be more than
40%;
- the house, which can be either new or a resale
property, must be in Canada.
NOTE: Major changes to the FHLI program came into
effect on May 11, 1998: in particular the
requirement concerning prior home ownership was
dropped and insurance fees were increased. Click
here
for details.
Shop Around
Mortgage loan insurance is just one of the many aspects
of financing with which you should familiarize
yourself, both for peace of mind and a fatter wallet.
For more information on mortgages, check the links in
the mortgages section
of our buyers' library.
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