The New Mortgage Insurance Guarantee Framework

The new mortgage insurance guarantee framework will establish a boundary on the risk characteristics of the mortgage and of the borrower that are acceptable when the Government guarantees the mortgage insurance policy. These requirements will apply to all government-backed mortgage insurance policies (whether issued by CMHC or private insurers) for high-ratio mortgages on residential properties with up to four units.

The Key Amendments to the Mortgage Insurance Guarantee Framework

There are four mortgage and borrower characteristics that define the key parameters of the new mortgage insurance guarantee framework:

A) Loan-to-Value Ratio

Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent. This limit will be reduced to 95 per cent. Borrowers may borrow the 5 per cent down payment, but it will not be insured under the new guarantee framework.

B) Amortization Period

Amortization is the period or length of time it will take to pay off the entire mortgage loan. The amortization period should not be confused with the "term" of the mortgage, which sets out the period over which a fixed interest rate or variable rate option will apply. A typical mortgage has a term of five years but an amortization period that is usually much longer.

The maximum amortization period for mortgages insured with government backing will be reduced from 40 years to 35 years.

C) Credit Score

A credit score is a numerical value that measures a borrower�s credit risk at a given point in time based on a statistical evaluation of information in the individual's credit file. It has been proven to be predictive of loan performance and is considered by some mortgage insurers and lenders to be the single best determinant of default risk. Credit scores are well-established industry tools and are generated in Canada by three private firms.

Canadian lenders have not originated many government-backed mortgages for borrowers with low credit scores. To ensure this practice continues, the new framework will establish a credit score floor of 620. There will also be a limited "basket" to provide for exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent low credit risks.

D) Loan Documentation

The initiative also includes minimum loan documentation standards to ensure that there is evidence of reasonableness of property value and of the borrower�s sources and level of.

E) Other Parameters

The new guarantee framework also includes other parameters that are required to give full effect to the initiative. These include:

• Excluding high-ratio mortgages where no amortization is required in the first few years from the government guarantee.

• Setting a maximum of 45 per cent on borrowers� total debt service ratio.

Moving to the New Framework

The new mortgage insurance guarantee framework is planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Exceptions would be allowed after October 15 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before October 15, 2008.

Source: Department of Finance Canada