Insured or Insurable?

As if it hasn't been crazy enough for lenders and mortgage brokers alike to understand the mortgage rule changes of the past two years. How are the frontline service people like Realtors supposed to answer questions presented to them from clients who are even more confused with the changes?

In Short:
Mortgages that are insured with "Mortgage Default Insurance" either through CMHC, Genworth or Canada Guaranty typically have one set of qualifying guidelines and competitive mortgage rates;

Mortgages that are not insured with "Mortgage Default Insurance" follow another set of guidelines and have corresponding mortgage rates.

In a nutshell home purchases and previously insured mortgage transfers are insured. Refinances Are Not . . . for the most part.

The Long
Most consumers and Realtors understand that regulated mortgage lenders in Canada can only lend up to 80% of a property's value. Any mortgage loan exceeding the 80% loan-to-value ratio must be insured against default through one of the 3 big insurers. This allows lenders to exceed the 80% threshold up to a maximum loan amount equal to 95% of a property's appraised value. This is also known as a High Ratio Mortgage (or high loan to value ratio).

Now what might not be common knowledge is many lenders insure their own mortgage portfolios against default and pay a required insurance premium for this service. This is true of many monoline, mortgage-only lenders, but even the banks, who use yours and my savings and deposits to securitize their mortgages need to default insure a portion of their mortgage book. What's happening now is these lenders not only have to pay their insurance premiums, they must also have more "Skin in the game" meaning more of their own capital to back (securitize) their mortgage loans according to regulators. Thus, what has evolved from the mortgage rule changes is the terms: Insured or Insurable which reference whether a mortgage is insured, i.e. high ratio mortgage insured against default through a borrower paid premium. Or Insurable, which describes a mortgage that qualifies for mortgage default insurance whether the premium is borrower paid or lender paid.

In either case, you can view both of these types of mortgages as before, High Ratio - Insured and Conventional - Insured. What does change, in addition to whether the insurance premium is lender or borrower paid is the mortgage rate that will be offered to a qualifying borrower. Believe it or not, High Ratio Insured mortgages are offered the best rates. But more so lately, borrowers with loan to value ratios of 65% or less have been offered comparable rates by the same lenders.

The big change has to do with the new term "Uninsurable" mortgage. Basically what this means is that a property that doesn't meet the guidelines as set out in the new mortgage rules does not qualify for mortgage default insurance. What does that mean? First of all, some lenders can't afford to insure and back their own mortgage portfolios so that means they can't take on any new mortgages that can not be insured. It also means a loan to value limitation of 80% of a property's appraised value.

Here's the kicker . . . the following circumstances do not qualify as an Insured or Insurable mortgage: 1) Refinances or Equity Take-out mortgages; 2) Non owner occupied rental units with only one rental; 3) Mortgages for Self Employed with non-traditional income; 4) Mortgages that don't qualify under the new "Stress Test Rate." and for all that, if you do find a lender who will lend in these cases, expect to pay a premium on the interest rate and perhaps even additional rate premiums on top of that for things like rentals, extended amortizations and non conforming income.

So what does this mean for Realtors? 

Gone are the days of traditional rate sheets or over-the-phone rate quotes. Now more than ever, Realtors need to enlist the services of a trusted mortgage professional to help them and their clients navigate the mortgage maze and provide information help focus their house hunting efforts.

by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca