Many of you know that the lowest mortgage rates in Canada often require default insurance. Insurance reduces credit risk and losses for lenders, and lenders often pass that savings through to consumers.
What many don’t know is how to get insured rates if you already have a mortgage.
Consider this example…
Suppose you bought a $900,000 home a few years ago and it met all insurability criteria at the time of purchase. But now, it no longer meets that criteria (perhaps because the home has increased in value to $1.4 million, which is above the $999,999.99 value limit for insurability).
So the question is, can you still switch lenders and get an insurable rate?
The answer, fortunately, is yes.
And the answer is yes even if your mortgage was uninsured at the time you got it.
A CMHC official explains:
“Provided that the uninsured mortgage remains unchanged (e.g., no increase in outstanding balance or amortization), the mortgage may be switched to a new Approved Lender and be eligible for transactional or portfolio [mortgage] insurance if the original property value was below $1,000,000. Note, this would be subject to meeting other standard eligibility requirements.”
Great! But insurable rates also depend on your loan-to-value (LTV). So that raises the next question: For rate quoting purposes, how would an insurer calculate your LTV in this example?
To answer this, let’s use our scenario above and assume the mortgage balance is now $700,000 and the property value has risen to $1.4 million.
CMHC advises that for insurable mortgages:
“The loan-to-value (LTV) would be based on the outstanding mortgage balance at the time of the request for…insurance and the original property value.”
(Note: This rule specifically applies to mortgages that are portfolio insured from CMHC, meaning the lender pays the insurance premium for you.
By contrast, private insurers Canada Guaranty and Genworth use the current property value in this case, not the original value. That means lenders who use private insurers to portfolio insure such mortgages can potentially do so more cost effectively because the loan-to-value is “lower.” This may, in turn, may result in more competitive interest rates for the customer.)
Given our example above, that means the $700,000 remaining balance must be divided by the $900,000 original value, which means the LTV for portfolio insurance purposes is 77.8%.
In this case, with a lender that uses CMHC, you’d qualify for the best available insurable rates that apply to LTVs of 75.01% to 80%.
And the good news is, such rates are usually lower than uninsured rates, so you’ll save a bit of money.
One Occasional Twist
In some cases you might actually find that transactionally insured rates are lower than portfolio insured rates.
In such a case, it might make sense for you to pay the insurance fee (0.6% of your mortgage amount) in order to get the cheaper rate.
But in this scenario, your LTV would be calculated a bit differently.
CMHC explains it as follows:
“…The loan would be eligible for transactional insurance subject to [the criteria] above, and in this case the LTV used to determine the premium would be based on the outstanding balance at time of the request for transactional insurance and the property value at that time.”
Hence, a $700,000 mortgage balance divided by a $1.4-million property value means your LTV for transactional insurance purposes is 50%.
You’d therefore pay a 0.6% insurance premium, or $4,200, if you went this route to get a better deal.
But for that to make sense, your insured rate on a 5-year fixed would have to be at least 15 basis points lower than what you could get without paying for insurance.
If you’re confused by anything here, a good broker can help explain it.
The main message is this. It pays to be cognizant of insurance rules when switching lenders. Knowing the above can sometimes lower your borrowing costs.
If you’re unsure whether your mortgage advisor understands all this, show them this article. Just keep in mind, not all lenders subscribe to these policies, so it takes a knowledgeable mortgage pro to sort through it all.