Last week there was some confusion over the new Canada Mortgage & Housing Corporation (CMHC) pricing policy. First of all, whenever you ask a lending institution to mortgage greater than 75% of the value of a home (with some exceptions), that lending institution must, by Canadian Law, get permission from an insurance company before they (lender) approve the deal. CMHC is one of those insurance companies. This special insurance coverage is called "default insurance." It is not to be confused with life insurance, disability insurance or fire insurance. It is strictly to protect the Lender in case of default. All insurance companies charge insurance premiums. With default insurance, the amount of the premium goes up with lack of down payment. Prior to May 11, 1998, those getting 90% financing (10% down) or those "first-time buyers" getting 95% financing (5% down) were charged the same premium, that being 2.5% of the mortgage amount ($2500 on a $100,000 mortgage). After May 11, 1998, anybody can mortgage 95% of the purchase of a residence (OAC), but the insurance premium goes up (by 50%) to 3.75% of the mortgage amount ($3750 on $100,000). The insurance premium normally gets added to the mortgage so you don't have to pay cash. The insurance premiums remain as they are today for lower "loan-to-value" ratios, and they are: a) 85.1 to 90% financing 2.5% of the mortgage amount b) 80.1 to 85% financing 2.0% of the mortgage amount c) 75.1 to 80% financing 1.25% of themortgage amount For 75% financing or less, you don't traditionally need default insurance coverage! The focus of my last week's article was to advise you that there are ways of avoiding this extra surcharge, without breaking your budget. As long as you have 5% down of your own money (or gift from a direct relative), you could "borrow" the extra 5% for down payment, thus bringing the mortgage request down to 90% financing, thus triggering the 2.5% insurance premium rather than the 3.75% premium. On a purchase of $100,000, that $5000 extra down payment you require can be borrowed as a personal loan from the same lender that is giving you the mortgage at, let's say, 10% over three years. The payments on that loan would be $161 per month. You must declare this amount on your mortgage application. The interest portion on that loan over the 3-year period would be $800, but it would save you the excess default insurance premium, that being $1125. It would also do one more thing for you! It would "train" your cashflow to afford an additional $161/mo. Once the personal loan has been paid off (in 3 years), you can now afford to increase your mortgage payments by that $161/mo. because you were used to paying it as a personal loan. Just using simple arithmetic, if the interest rates on your mortgage were to stay stable at lets say 6.5%, that extra $161/mo. would shorten your amortization to 14 years from 22 years, thus saving you a whopping $57,800 in interest. You, as a Consumer, should not have to go through this exercise. The lending institution who is lending you the money should be prepared to make this a suggestion to you rather than automatically adding the increased premium to your mortgage and be done with you. It takes a few more minuted to explain your options but at least they can then say with confidence that they were working for you. The system is flawed. More and more lending institutions are relying on the computer profile to approve your mortgage. The system dictates that the Consumer will not spend more than 32% of gross income for the mortgage payments (including taxes and heat), and that all payments combined (inclusive of mortgage payments above) will not exceed 40% of gross earnings. So if your debt service numbers are less than the maximum allowed, the computer should be programmed to ask the question . . . "does this Consumer desire to increase the payments on the mortgage or borrow short term to increase the down payment?" You should not arbitrarily accept what your lender has designed for you. It may indeed be the best deal you can get, or it could be a normal computer profile approval. I would bet that it is the latter. Have the deal checked out by a competitor, or by a simple phone call to me. Remember, you are the Consumer, without you none of us can exist!