INSURED VERSUS UNINSURED MORTGAGES
In Canada, when applying for a conventional mortgage, the lender typically will require approximately (or at least historically) a 20 per cent down payment. Because over the last two decades home prices have increased dramatically, many borrowers find it difficult to raise such a high down payment.
Mortgage insurance is therefore available to Canadians in order to allow what is called “high-ratio” financing. Mortgage insurers, such as CMHC, will nance approximately 95 per cent of the purchase price of a home, allowing buyers to proceed with a purchase, and at the same time protecting lenders whose risk clearly increases with high-ratio lending.
The insurer will charge the borrowers for the financing. Usually the charge to the borrowers is a percentage of the loan. Typically the fee is subtracted from the amount the lender will actually advance, which has the effect of increasing the down payment requirement to the borrowers. Historically, the charge was around 2.50 per cent of the loan amount.
Mortgage insurance allows the buyers to realize their dream of home ownership by protecting approved lenders against buyers who default. The insurance premiums vary and depend on whether the mortgage loan is advanced all at once or in instalments, e.g., a building loan. The lender picks the processing option and the applicable premium is charged.
For insurance purposes, there are conventional mortgages and high-ratio mortgages. For conventional mortgages (which are uninsured), financing is generally restricted to a maximum of 75 - 80 per cent of the loan-to-value. (Loan-to-value means the percentage of loan to the appraised value of the property or the purchase price, whichever is less.) In cases where the mortgage will exceed 75 per cent of the loan-to-value (high-ratio), the mortgage has to be insured, although the bank will also consider risk assessment when lending insured mortgages. Lenders have underwriters who look at underwriting policies and statistical information to determine risk assessment. In addition to looking at the risk level of the buyers, they also look at the market conditions and the property to be mortgaged.
Mortgage insurance is available for residential properties of up to four units, as long as the owner occupies one unit. This includes single-family houses, manufactured homes, condominium units, houses on leasehold land, and housing on reserves. This enables buyers to purchase a home with as little as five per cent down. The minimum five per cent down must come from the borrower’s own resources, and the lender must verify that the borrower can cover. Buyers should be aware of legal fees, appraisal fees, and Property Transfer Tax (PTT), etc., which is always changing. Amortization is usually restricted to a maximum of 35 years.
The maximum loan-to-value ratio is:
◆ one unit – 95 per cent
◆ two units (duplex) – 92.5 per cent
◆ three or four units – 90 per cent
There are several types of properties, which may be turned down for conventional, and/or high- ratio mortgage purposes. These are:
◆ seasonally occupied properties/cottages, ski chalets;
◆ rooming or boarding houses;
◆ houses of inferior construction (structural problems/foundation, trusses, decaying oor joists/ lacking central heating system);
◆ properties in an area that is being rezoned and redeveloped, where the value is entirely or predominantly attributable to the land alone;
◆ houses containing urea formaldehyde foam insulation (UFFI);
◆ most property located in an area that is zoned commercial or industrial;
◆ property in a deteriorating location or neighbourhood;
◆ a residential unit within 200 feet of an overhead, elevated roadway, and close to overhead high tension wires;
◆ property which is serviced by a polluted well, or trucked-in water, or a from water source which is illegal or not guaranteed with an appropriate party agreement;
◆ property which backs onto industrial building/auto repair shop/gas station;
◆ condominium units in a building in which the condominium corporation does not have an adequate reserve fund or has pending lawsuits. This will create marketability problems for the units;
◆ property which does not have a central heating system or adequate electrical service (less than 60 amps);
◆ property in remote areas, where there is no determinable real estate market; and
◆ property in environmentally sensitive areas.