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Changes to Government Guaranteed Mortgages

Created: 04 September 2008
Hits: 1979

Recent changes to Government Guaranteed Mortgages – An Overview

Many Canadians generally understand how mortgage insurance works.  We're not talking about mortgage life and critical illness insurance, we're talking about mortgage default insurance.  This is the premium that is applied to your mortgage amount and is paid to a mortgage insurer, who in turn agrees to insure your mortgage with your lender in the event you default.  In other words, it is protection for the lender in case their customer cannot make their payments.  This is a mandatory insurance for mortgages higher than 80% of the home value.

 Enter the government guarantee.

 The Canadian government will guarantee up to 90% of the mortgage amount against insurer default.  So, this is security for the lender in the event the insurer defaults.  This Government Guarantee is in place for CMHC (Crown Corporation) as well as the private insurers, such as Genworth Financial Canada. 

 The government guarantee is also a criterion for high ratio loans to be sold into the Canada Mortgage Bond program, which is a relatively new cost-effective funding source for banks and mortgage lending companies.  These Bonds are bought up by investors all around the world due to their higher yield than Government of Canada Bonds combined with their "government guarantee".

 What has changed?

 After an analysis of the mortgages in Canada that fall within their guarantee, recent trend, industry consultations, and credit events in other countries, the Minister of Finance decided to cease guaranteeing high ratio mortgages with the following characteristics:

-          LTV ratios in excess of 95%

-          Amortizations in excess of 35 years

-          Non-amortizing mortgages (Interest-Only Mortgages).

-          Applications where the beacon score of both borrowers is less than 620. A beacon score is an evaluation of your credit history and debt obligations. Lenders use it to assess their risk and establish borrowing conditions. The higher your beacon score the better access to broader products and more favorable interest rates.

How does this affect me?

 If you are a current homeowner and have no intention of moving in the near future or don't require a 40-year amortization because you have sufficient equity, than this won't affect you.  However if you are a prospective homebuyer, looking for 100% financing and a 40-year amortization then your financing options are becoming a little more limited. Interest-Only Mortgages will still be available however you will be required to have a downpayment of greater than 20%.  Most of the big chartered Banks and many lenders are following the new criteria now.  Other lenders however are offering these products until the October 13th deadline.

For more information on these changes and how they impact your financing options, please feel free to call 1-800-687-9020.