We’ve all heard the saying ‘necessary evil’ – something that we need or must have but don’t necessary like. It’s kind of like taking cough syrup that doesn’t taste so good but you know you need it to feel better.
Default mortgage insurance is a necessary evil. Without it, we wouldn’t be able to buy a home with less than a 20% down payment with low interest rates.
But what if you bought a house, paid the CMHC, Genworth or Canada Guaranty insurance… and a few years later you bought a bigger home or refinanced your mortgage for some home renos or debt consolidation?
Do you have to pay mortgage insurance again? If so, how much will this cost?
Financial Planner story gives new meaning to ‘necessary evil’
One of my readers, a Financial Planner, shared an experience with me. (And, I must admit, this isn’t the first time I’ve heard about this happening.) His client had a CMHC-insured mortgage and then later wanted to refinance the mortgage for some home renos… It appears his client was charged FULL CMHC insurance premiums on the entire mortgage, AGAIN!! This just isn’t right! We call this DOUBLE CHARGING!
Lender or Banker ERROR!
An insured mortgage can be refinanced with REDUCED insurance premiums charged ONLY on the NEW funds. It’s up to the submitting Lender or Banker to inform the Insurer that the current mortgage is already insured. Unfortunately, I’ve heard of other cases where the Banker didn’t have the experience, knowledge or even care to take the time to inquire if the current mortgage was already insured… and then went on to simply process the application as a NEW insured loan. And the borrower gets stuck paying the FULL COST again!
How much would a mistake like this cost?
*Please note this article was originally posted several years ago. While the numbers and insurance premiums have gone up since then, the examples below remain relevant.
Let’s assume someone bought a house for $350,000 in January 2008 and they required a 95% loan-to-value mortgage, or $332,500. They opted for a 35-year amortization. They would have paid mortgage insurance of 3.15% or $10,473.75, giving them an original starting mortgage balance of $342,973.75 (the insurance gets added to the mortgage and is not payable upfront).
Fast forward… their home is worth $402,000 and their mortgage balance is approximately $331,149 with a 32-year amortization remaining. They want to refinance up to 90% of the value of the home. That would give them $40,200 in new funds and their mortgage would be $361,800 (before insurance). The borrower will be charged additional insurance on the new funds only at the rate of 4.65% or $1,869.30. The new mortgage is $363,669.30.
But what if your Banker didn’t submit your application to CMHC, Genworth or Canada Guaranty as a previously insured mortgage? What if your Banker sends your CMHC-insured mortgage to Genworth or Canada Guaranty? What if you weren’t given credit for the previous insurance you had paid? Think this can’t happen? Guess again! It has happened before and it will happen again.
And now the results of the Banker’s mistake
That same mortgage will cost you $6,813.90 in extra mortgage insurance. That’s because your banker submitted your application to the insurer as an entirely new mortgage application. You’ll be paying new insurance on the entire mortgage.
Here’s the formula: $361,800 x 2.40% or $8,683.20. Your new mortgage is $370,483.20 – a difference of $6,813.90. That’s right – an overcharge of $6,813.90. And, remember, this gets added to your mortgage so you’re paying interest on this for 32 years!! The additional interest will cost you another $4,915 in interest. That’s a grand total of $11,728.90 of unnecessary expenses. This isn’t necessary, it’s just evil!
We can only hope that this problem isn’t widespread. If you’ve experienced something similar, speak with your Mortgage Broker to get a review. I’d certainly be interested in hearing about it.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; email@example.com
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.