We’ve all heard the saying, ‘necessary evil’….. You know… something that we need or must have but don’t necessary like…. kinda like that 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 or Genworth insurance….and a few years later you bought a bigger home or you refinanced your house for some home renos or debt consolidation? Do you have to pay CMHC or Genworth insurance again? If so, how much will this cost?
A Financial Planner’s story gives new meaning to ‘necessary evil’
One of my reader’s, a Financial Planner, shared a recent experience…. and I must admit, this isn’t the first time I have seen or 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 is not right…. and we call this DOUBLE CHARGING.…
A CMHC or Genworth or Canada Guranty insured mortgage can be refinanced with REDUCED insurance premiums charged ONLY on the new funds. It is up to the submitting Lender or Banker to inform the Insurer that the current mortgage is already insured. Unfortunately, I have seen and heard of other cases where the Banker did not have the experience or knowledge or cared 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 CMHC or Genworth insured loan (Canada Guaranty is fairly new and I have not seen any cases involving them yet)… And the borrower gets stuck paying the FULL COST again….
How much would a mistake like this cost?
Well, here’s an example and some formulas to follow…
Let’s assume we have someone who bought a house for $350,000 in January 2008 and they required a 95% loan to value mortgage, or $332,500. They took 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 up front).
Fast forward to today…. their home is worth $402,000…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 or Genworth as a previously insured mortgage? What if your Banker sends your CMHC insured mortgage to Genworth or your Genworth insured mortgage to CMHC? What if you weren’t given credit for the previous insurance you had paid? Think this can’t happen? Guess again…it’s happened before and it sounds like it’s happening 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 will 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 are 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 expense… this isn’t necessary, it’s just evil.
We can only hope that this problem isn’t widespread. If you’ve experienced something similar then I suggest speaking with your Mortgage Broker to get a review… I would certainly be interested in hearing about it.