The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Who is Genworth Canada?
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With housing prices as high as they are, most consumers wouldn’t be able to afford a home purchase without the help of a mortgage. But the lenders who provide mortgages place themselves at great risk considering the fact that borrowers may be unable to continue making their mortgage payments at some point throughout the life of the loan.
That’s why mortgage default insurance exists. This specific type of insurance policy is designed to help protect mortgage lenders in the event that a borrower no longer makes their payments. And even though it’s the lender who is being protected by such a policy, it’s the borrower who pays the premiums.
In Canada, there are three mortgage default insurance providers, including Genworth Canada.
So, what exactly does Genworth Canada do?
Who is Genworth Canada?
Genworth Canada is the country’s largest private residence mortgage default insurance provider and plays a key role in helping buyers become homeowners.
What Does Genworth Canada Do?
Genworth Canada offers insurance to help protect lenders when offering mortgages to borrowers. In turn, this helps make mortgages more readily available to homebuyers. Without this type of insurance policy, lenders would be less likely to approve home loans, which would drastically limit the number of homeowners in the market.
With an insurance policy in place, lenders are better able to loan larger sums of money to borrowers to help them make their dreams of homeownership a reality.
Are Genworth Canada and the CMHC The Same?
While both Genworth Canada and CMHC (Canadian Mortgage and Housing Corporation) provide mortgage default insurance, they differ in that CMHC is a federal corporation, while Genworth is a private insurer.
Their premiums are nearly identical, so using one over the other doesn’t make much of a difference to the homeowner. And since it’s the lender who is being covered, it doesn’t matter a great deal to the homeowner which insurance provider is providing coverage.
What is Mortgage Default Insurance? Is it a Requirement?
Not all borrowers who take out a mortgage will have to pay into mortgage default insurance. It will all depend on the down payment amount being put forth after the real estate deal goes through.
In order to avoid paying the mortgage default insurance, borrowers must put a down payment of at least 20% of the purchase price of the home. Any less than this will require borrowers to pay this additional insurance premium. Mortgage default insurance is a requirement for down payments between 5% and 19.99%.
With at least a 20% down payment, the loan amount required will be smaller. That means the borrower will have more equity in the home at the onset of the mortgage. The higher the down payment, the less of a risk to the lender in terms of the chances that the borrower will default on the mortgage.
While the need to pay more into a mortgage may seem like a nuisance, this type of policy makes it possible for more consumers to become homeowners. Without it, there would be far fewer people who would be able to afford a home purchase and acquire a mortgage.
The premium can either be paid in one lump sum at closing or can be rolled into the mortgage
payments and paid little by little over the course of the mortgage.
Do you know how long you should amortize your mortgage for? Click here to learn more.
How the Stress Test Affected Mortgage Default Insurance
Over the recent past, borrowers who applied for a mortgage in Canada have found it more difficult to get approved because of a recently modified mortgage stress test. Not only do borrowers have to prove that they are capable of handling mortgage payments at today’s mortgage rate, but they must also be able to show that they can handle payments if rates increase at some point in the future.
All federally-regulated banks must qualify borrowers at a rate equal to either the Bank of Canada’s five-year benchmark rate (currently 5.34%) or their own interest rate – whichever one of the two is greater – plus two percentage points.
Not only has the mortgage stress test taken its toll on borrowers, but it’s also impacted mortgage default insurance providers like Genworth Canada. The private mortgage insurer says that the total value of new insurance written over the second quarter of 2017 was down 81% from the same time the year before.
The majority of the decrease was because of a huge decline in the value of insurance written over that time period, which is insurance purchased by banks and other financial institutions for their uninsured mortgage assets.
The changes have also made it more challenging for banks to purchase bulk portfolio insurance to protect against uninsured mortgages with default risk. In turn, the sale of portfolio insurance has significantly slowed. According to Genworth, income from premiums written in the second quarter of 2017 fell 32% from the same time the year before.
How Much Does Genworth Canada Mortgage Insurance Cost?
The amount that you need to pay into your premiums will depend on your loan amount, or more specifically, your loan-to-value (LTV) ratio. Your LTV is essentially your loan amount divided into the value of the home. The higher the LTV, the higher the risk for the lender, and therefore the more you’ll pay for mortgage default insurance.
Generally speaking, you can expect to pay anywhere between 0.60% to 4.0% in premium rates.
While mortgage default insurance is meant to protect the lender, you’ll be the one paying the premiums if you are unable to come up with a down payment of at least 20% of the purchase price of your home. Be sure to budget accordingly when you apply for a mortgage and start the search for a new home to buy.
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