Who are the 3 Default Insurers? And, what does this mean for the borrower?

It is hard to believe that we are about to launch our 4th Mortgage Mechanics Video since we
started this adventure back in June. It has been full throttle with Sproing Creative – which
has been a good thing because blogging about anything Mortgage related is not necessarily
the most entertaining of subjects. What we have discovered is that many have a relative
understanding of mortgage lending but when it comes to Mortgage Terminology or
understanding the process, this is where we see a disconnect.

So our video series is designed to fill in the missing pieces. To bring awareness to what
“Brokers” do and what they can offer to their Community and to their clients. In essence,
we are bringing an educated series designed to help those understand the “little” things
that typically end up being bigger problems if not disclosed properly. How do we, as Brokers,
ensure that our clients have a good understanding of what their mortgage can or cannot do
unless we ask the necessary questions?

Here’s the problem: how do we make anything about mortgages entertaining? Let alone
speaking about Default Insurers. It’s a fairly dry topic so I will do my best to touch on a few
aspects that are important. Third party default insurance is required when any borrower,
whether refinancing, buying, or building, has less than 20% down. Now, you may think that
this premium you pay on your mortgage provides you with the benefit – and why wouldn’t
you when this premium could be thousands of dollars added to your mortgage. It would only
make sense that this means your Mortgage is insured to protect you. Unfortunately, this
Insurance is designed strictly for Mortgage Lenders. In Canada, “mortgage insurance is
required federally on high-ratio mortgages – that is, mortgages with a down payment of 20
per cent or less. This insurance, which protects the lender in case of borrower default, gives
lenders the flexibility to offer borrowers with low down payments the same low interest
rates they would offer to homebuyers with more equity”.

In the world of technology, many utilize Mortgage Calculators present on the internet to
calculate their mortgage payments. And why not – Google is now in the Oxford dictionary so
anything you find on Google must be correct! Have you ever had a client that was shocked
because the payment they acquired themselves online is much less than the payment we
actually end up with? The chances are, “yes”. These online calculators do not offer the
Default Insurance premiums nor do they explain when they are needed. They are a simple
tool designed to give you a payment based on a total mortgage amount, interest rate and
amortization schedule. So if you are not aware that CMHC, Genworth, or Canada Guaranty is
required, then you will be given a number that is not reflective of the whole. To see what the
premiums are – go to http://www.cmhc-schl.gc.ca/en/co/buho/buho_023.cfm This is a
great calculator that can be used to determine CMHC costs based on your purchase price less
your down payment. No more hidden surprises. If you are wanting to see what the
premiums are based on your level of down payment visit Genworth’s website:
http://genworth.ca/en/lenders/premium-rate-table.aspx

Now, there are some cases that default insurance, which is offered through CMHC, Genworth
Financial, and Canada Guaranty, will be applied regardless of the size of down payment. So
just because you have 20% down doesn’t mean that you can avoid these additional
completely! Some of these situations could be the purchase of a mobile home in a park.
Mobile homes require CMHC even if 50% is put down. This is because of the type of home
being financed and where the home is located.

I’ve had clients purchase larger size properties, usually 10 acres or more, that require
insurance. This doesn’t apply in every instance but the reason we look at it as a possible
financing policy is that most lenders will ONLY consider the home and surrounding 10 acres.
And for some lenders, it could be no more than 5 acres. So what does this mean? If the
Lender only considers 10 acres of land value but you have 50 acres then we are not valuing
the remaining 40. Consequently, we would be excluding 40 acres of value against the
appraised value which would mean that A. The borrower would have to come up with a much
larger size down payment, or B. We try using CMHC to obtain the value that we require.

In our area, we do see a significant aging population. We are known for our sunny skies,
warmer weather, mild Winters, Golf, Skiing beaches – you name it! With this, Developers
have constructed many developments that cater to a specific age group. Normally, these
developments are “age restricted”. If you are below age “55” then you need not apply! Due
to the nature of the development, Lenders will require default insurance because these
developments are typically seen as less marketable to the Lender, and therefore, the lender
would prefer to have security attached to the property. And this is by demanding default
insurance. Keep in mind, that this insurance is designed to protect the Lender. The more
insurance they have the more inclined they would be to finance a property that isn’t available
to every buyer’s market.

As you can see, Mortgage Lending is a cornucopia of twists and turns. Every client is unique.
Their personal situation will ultimately determine how we approach financing. And the same
goes for the property. This is why our role as a Mortgage Broker is to educate or clients – to
help them understand why their file requires a slightly different policy or product then their
neighbors. And yes, we do talk to our neighbors. We talk to our friends and family and co-
workers. We all want to make sure we are getting what they have received or what they tell
us we should receive. Everyone has an opinion BUT a Mortgage Broker’s opinion is not just
opinion. It is based on experiences, fact, and credibility. We are Professionals working for
you and only your personal circumstances can determine the course of action we will take.

Build dreams, Open doors.

Kari Gares
Okanagan Power Broker