Mortgage Insurance a Pillar of Canada's Strong Housing Market

Terrence Belford, Canwest News Service Published: Wednesday, March 31, 2010

Mortgage insurance, policies that protect lenders in case of default, has revolutionized the Canadian housing market, experts say. For a relatively low premium, tacked on to the face value of a loan, buyers can own their home with as little as a 5% cash down payment.

First introduced about 35 years ago by what was then Central Mortgage and Housing Corp., it has meant that as prices across the country soared, so did the ability of the average working Canadian to buy a home without waiting years to raise a 20% down payment.

"We just would not see the strong housing market -- new and resale alike -- that we have enjoyed for the past decade without mortgage insurance," says Ajay Soni, senior broker with Invis, a national lender, in Vancouver.

"Without it, Canadians would still face either the need for 20% down payments or substantial second mortgages at high interest rates. It has shaved years off the time families must scrape and save for a down payment."

To give an idea of the scope of mortgage insurance, in 2008 alone Canada Mortgage and Housing Corp. insured 400,000 residential loans in Canada, says Mark McInnis, vice-president underwriting, servicing and policy at CMHC.

In that same year, four out of 10 new and resale homes carried mortgage insurance, says Peter Vukanovich, president of Genworth Financial Canada, a third company that provides mortgage insurance in Canada. The other is AIG Guaranty Canada, which was recently purchased from American International Group Inc. (AIG) by private investors led by the Ontario Teachers' Pension Plan.

So just what is mortgage insurance, who needs it and what does it cost?

Mortgage insurance protects lenders against default by borrowers. "Simply put, it protects them against loss," Mr. Vukanovich says. That loss protection means banks and other financial institutions are more eager to take a risk on a borrower who only starts out with 5% equity in a new home.

In fact, mortgage insurance is legally compulsory on any residential mortgage made for more than 80% of the appraised value of a new or resale home by a federally regulated lender such as a bank, says McInnis.

As for premiums, they generally start at 1% of the face value of the loan if there is slightly less than a 20% down payment and rise to as much as 2.75% with 95% financing, Mr. McInnis says. That premium is tacked on to the principal amount of the loan and slowly paid off during the term of the mortgage.

"As an example, suppose you took out a $200,000 mortgage with maybe less than 10% down," Mr. Vukanovich says. "If the premium was 2.5%, then you would actually borrow $205,000."

How do you arrange mortgage insurance? You don't. Either the lender or the broker handling the loan processes the application, works out the premium and adds it on to the face value.

"The three most important factors to us as an insurer are a borrower's credit rating, their ability to repay the loan and the appraised value of the property," Mr. McInnis says.

As a general rule of thumb, CMHC wants borrowers to be spending no more than 32% of their gross income before taxes on housing costs including property taxes and utilities and no more than 40% of gross income on debt of all kinds including car loans, student loans and credit card debt.



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