The ins and outs of mortgage insurance

Insuring your mortgage

Photo: Pixabay

First off, some happy news. It sounds like insurance companies are back to offering home insurance policies in our area.

This is still on a case-by-case basis and, of course, depends on the location of your home. If you are one of the people whose home purchases were put on hold over the last few weeks, I’d suggest connecting with your insurance broker today to see if they are now able to offer you a policy. I connected with the company I refer my clients to and it said Monday it has several policies in place in Kelowna.

I’ve touched on mortgage insurance before, but after a few conversations over the last two weeks, I feel it is worth revisiting.

When you are working on your mortgage, there are two types of insurance your mortgage professional will talk about (three if you include the home insurance policy you will need at closing).

The first is mortgage default insurance, which is often referred to as “CMHC insurance.” There are actually three organizations in Canada that provide this insurance—CMHC, Genworth, and Canada Guaranty.

Mortgage default insurance protects the lender in the event that the borrower defaults on their mortgage payments. That insurance is mandatory if you put down less than 20% when you buy your home.

It is a one-time premium which is added to your mortgage up front. It is calculated on a sliding scale, so the more of a down payment you have the lower your premium will be. This premium can be ported from one property to another, subject to certain criteria, which can save you thousands of dollars.

The premium protects the lender, so if your home goes into foreclosure, it does not have to absorb any loss.

The second insurance that will be discussed with your mortgage professional is mortgage protection insurance. That is commonly life and disability insurance that protects you as the borrower. Banks and brokerages offer different coverages, so it is important to understand a few key differences.

This optional insurance is generally paid monthly, and in most cases can be cancelled at any time.

In my early days, I didn’t spend much time discussing the insurance coverage we offer. At the time, we had a different product that (in my opinion) was very expensive and didn’t offer great coverage. Over the years, I’ve heard many stories about how clients’ lives have been impacted by either having, or not having, insurance coverage in place.

Within two months of each other, two of my clients had very close calls. At the same time, our firm changed the insurance product we offered. The (new) product is far more reasonably priced, is portable and flexible to meet client needs.

As a broker I must offer my clients optional life and disability insurance coverage. The product our firm offers is Manulife Protection Plan (MPP). Clients have the option of waiving all together or taking life and/or disability coverage.

Most lenders offer coverage a second time when clients either sign documents in the branch or at the lawyer’s office at the time of closing. A key difference between what we offer up front and what is offered by the lender is the portability option.

MPP can be ported from one lender to another in the event you choose to switch lenders down the road. It can also be ported from one home to the next when you sell.

Most lender products only cover this particular home and their own mortgage. If you switch or sell down the road, you will need to re-qualify based on your age at the time, which means your premiums will likely go up.

I am a firm believer in having insurance in place to protect yourself and your family in case something unfortunate happens. I am not a licensed insurance professional, so when I discuss insurance with my clients I always ask if they have coverage in place.

Part of our discussion includes my recommendation to discuss coverage with a life insurance professional as there may be products out there that are a better fit for their particular situation.

MPP insurance is free for the first sixty days, so if I have clients who plan to look into more detailed options, I suggest they opt in and cancel down the road after they’ve made the time to meet with an insurance professional. This product kicks in the from the time the application is submitted and is fully underwritten up front.

Some people have strong opinions one way or the other about the value of insurance. Based on my experience I feel strongly that it is important to review your options with a professional to ensure you are adequately protected.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Mortgage renewal 'sticker shock' prompting difficult decisions

Mortgage renewal options

Photo: Pixabay

Currently, I am fielding a high number of calls from people looking for information about mortgage renewal options.

In 2016, when the mortgage “stress test” was introduced, I remember questioning the wisdom of the new qualification guidelines. I also remember qualifying clients based on a rate of 4.64 % when their mortgage rate was only 2.24% (that was the Bank of Canada benchmark rate at the time) and feeling a bit frustrated that their borrowing power had been reduced.

Clients had to look for ways to strengthen their applications. Over the last few years, with prices and rates increasing, this has meant clients have been leaning on family for help with their downpayment or adding them to their applications as co-signors.

By 2018, the Bank of Canda benchmark rate we were using to qualify clients had risen to 5.25%.

Fast forward to 2023 and those mortgages are now coming up for renewal and clients are looking at renewal rates around 6%. In theory, the “stress test” was bang on and clients were qualified to actually make the payments based on the renewal rates they are facing today (plus or minus a 0.5%). In theory, clients should be able to carry their new higher payments based on today’s interest rates and, in theory, clients’ income have risen over the last five years. But reality looks a bit different.

The cost of living has skyrocketed. I’m sure we all feel it every time we see our bill at the grocery store or the fuel pump. I don’t have official statistics but I am seeing many clients carrying more consumer debt when I review their updated applications. It is not unusual to see people trying to manage a credit line, multiple credit cards, and even one or two vehicle payments.

What this increased consumer debt means for a few clients that I’ve worked with is they either need to stay with their current lender and accept the renewal rate offered, or they need to consolidate their consumer debt into their mortgage in order to afford to stay in their homes.

The significant increase in house prices over the last five years means refinancing at renewal is an option. Sometimes, arguably many times, this is the right decision in order for clients to reset their finances. Sometimes harder decisions need to be made. Is that the right decision long term?

One of the other options is selling their homes to get out from under the consumer debt but the challenge with that decision is that suitable rentals are hard to come by and in many cases, the monthly rent payment is higher than what a mortgage payment would be.

The sticker shock of renewal rates and payments has been sobering this fall. If you have a mortgage coming up for renewal over the next few months, I encourage you to connect with your lender or mortgage person at least four months ahead of time to look at what your options are.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

The impact of wildfire on mortgages

Mortgages in a time of fire

Photo: Neil K. Lalach

The McDougall Creek fire on the night of Aug. 17.

This week it feels like almost every conversation starts with a question and answer and fire update.

I am very fortunate in that my family lives just outside of an evacuation alert area, so we did not have to leave our home. This has not been the case for many of our friends and neighbours.

The first few days were chaotic and truly frightening. After a few initial adjustments (aka moving my horses a little further from the fire) and packing my trailer in case we had to leave, we’ve settled into an uneasy routine.

Looking at the B.C. Wildfire app on my phone, the entire province basically shows up as red at this point which means there is an active fire somewhere nearby. I have spent the last few days trying to connect with my clients who either live in an active fire zone or have a purchase finalizing in the near future. There have also been a few very heavy conversations with people who have lost their homes.

If you are a homeowner and have been affected by the fires, please reach out to your mortgage provider. I see emails every day about how lenders are stepping up to offer support and relief to their clients.

I am checking in with clients who have mortgages finalizing soon because part of the purchase process is organizing insurance coverage for your new home. This is a condition you need to address before you remove all of the conditions on your purchase and make it a firm and binding contract. Timeline-wise, this means you research insurance packages and obtain an undertaking to insure within the first few days of writing your offer.

The fine print includes verbiage that essentially states the insurer will not insure your home at closing if certain conditions change. One of those conditions is a wildfire within a certain radius of your new home. Most times your closing is weeks, or even months, down the road.

Most clients firm up their insurance coverage a few days prior to the completion (finalizing) of their purchase.

The good news is every purchase contract I’ve seen over the last few years includes a “force majeure” clause. This clause extends the contract when the parties cannot complete the purchase due to a catastrophic event such as a nearby fire.

The other good news is that there are still companies that will offer new insurance policies for homes closer to fire zones. The bad news is that they are considerably more expensive.

The tradeoff for everyone I’ve talked to so far is that they have everything organized to leave their current home and if they do not move forward with their purchase they will be scrambling for a place to live.

If you have a purchase closing soon I recommend you double-check that the insurance company you originally connected with is still willing to provide coverage for you. This way you will not be left scrambling a few days before your closing date.

•••

Straying from mortgages, I want to share a few thoughts and observations.

I have been overwhelmed by the reach-outs, check-ins and offers of support from friends near and far. I have heard amazing stories of people helping each other and opening their doors to strangers.

I have also heard stories about people taking time off work to volunteer where needed in our community and have also heard through the grapevine that our local food banks are in tremendous need of support. They have been helping so many families who are out of their homes and struggling to keep things right-side up.

I am very thankful for the friends who took my horses on short notice. I’m thankful for a support network that has kept me sane over the last week. I have seen many shining examples of people helping each other day after day.

I am so incredibly grateful for the men and women who have been working tirelessly to save our community.

Thank you for all you do.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Challenging times in the world of mortgages

Mortgage criteria increasing

Photo: Pixabay

Sometimes, when I sit down to write my column, I struggle to find a topic that I’d like to write about. Other times, like today, I have a clear idea of what I’d like to say.

For the most part, I love what I do. I enjoy meeting and working with my clients, and there is something to learn every day. Many days I come across a new product or lender, changing guidelines that offer better solutions for my clients or ways to enhance my process.

The last few months have been challenging for everyone in the mortgage world. With rates continuing to rise and no noticeable drop in housing prices, many clients are finding it tough to qualify to purchase a home. More troubling for me is seeing more families struggling to make ends meet.

I feel like many lenders are hunkering down and tightening their belts. Some are running short-handed or operating with many new staff members who are trying to learn the ropes.

Over the last few weeks, I’ve had conversations with two of my favourite lenders about changes behind the scenes.

On overall strong files (not high-ratio insured files) there are lenders that will consider exceptions if the numbers are not where they need to be. What that means is that in cases where clients have significant equity in their home and a clean credit history, these lenders will allow the numbers to go a little higher than their published guidelines.

Over the last few weeks both of these lenders have had policy changes limiting the exceptions they can ask for and approve.

Files I would have been confident submitting even two or three months ago are now being declined if the ratios are out of line. I understand the logic, these files are a higher risk to the lender. However, particularly with refinances, the new mortgage payment will actually put the clients in a far better position with respect to cash flow.

Equally frustrating, it feels like lenders are becoming even more particular with their document requests. As an example, specialty programs designed to provide solutions for high net worth clients require every document you can imagine, plus a pint of blood. (The pint of blood was not really asked for, although I did have one client comment who figured a full cavity search was coming next.)

Being the intermediary between a client who doesn’t want to provide any more information and a lender that requires it is a balancing act. I understand how clients can feel the document requests are over the top and intrusive.

Putting myself in the lender’s position, I understand why they want to be confident in their clients before handing over mortgage funds. They have no interest in foreclosing on properties – their income comes from collecting interest on their mortgage funds.

When I start working with clients, I do my best to explain how particular lenders can be with respect to the documents they ask for. I find it very frustrating to have to explain and justify what we are asking for.

The other challenge with staffing levels at certain lenders is it can take them four or five days to review and sign off on documentation submitted. There are some lenders that are easier to work with in terms of documentation, but the tradeoff can be higher rates or slower turnaround time.

The mortgage world is certainly challenging right now but the positive news is lenders are constantly looking for better options for their clients.

My suggestion is to have all of your paperwork organized and a mortgage pre-qualification in place well before you move forward with writing an offer to purchase a home. Take your time and educate yourself as much as you can.

Choose a mortgage professional who is able to help educate and support you as you navigate your mortgage application.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.