Mortgage 101 – High Ratio Mortgage Insurance with Chris Johnson

Chris Johnson from Sagen joins us on Mortgage 101 to discuss the importance of high-ratio mortgage insurance, which allows buyers to access homeownership with as little as 5% down, making it more affordable for Canadians.

Benefits of High Ratio Mortgage Insurance

Dan Ahlstrand
A little bit mellower start to this segment of Mortgage 101. Welcome back. I’m Dan Ahlstrand sitting in for Todd Veinotte this month. Beside me is Clinton Wilkins, our mortgage guru, and on the other side of the table, we’re very pleased to welcome to welcome to the program, Chris Johnson who is the manager of sales enablement with Sagen. Welcome!

Chris Johnson
Thank you so much for the invite.

Clinton Wilkins
Financial Literacy Month is just so, so important. And I really wanted to bring you in because there’s been so much noise in the media around things going on around high ratio insurance, and obviously there’s three insurers, and we’re going to let you explain a little bit to us. But why don’t you just give us a high level overview of what does Sagen do? Who are your competitors? Why does someone need high ratio mortgage insurance?

Chris Johnson
And it’s an interesting point, because a lot of really, what we do is in the background. And so we work with partners like yourself, Clinton, as a mortgage professional, and the lenders that you use, but often we’re not seen by the average consumer who’s buying a house. We’re there if there’s less than a 20% down payment, but people don’t always know that we’re in there in the background. So essentially, where Sagen comes in is if somebody is buying a home and they have less than a 20% down payment, is usually when we’re engaged. That’s a federal law within the bank Act of Canada. So anybody that is buying a home has to have the insurance. So it’s really not a choice. It’s either you have it or you don’t based on your down payment.

Clinton Wilkins
You eithe get approved for the insurance, or you’re putting down 20% or you’re not buying that house.

Chris Johnson
Exactly, that’s right, and you’re right during COVID, and through the pandemic, prices, of course, were going up, and people were having a hard time getting down payments in place to buy and looking for a lot of options. And that’s really where, high ratio insurance can certainly come in.

Dan Ahlstrand
What are people buying when they buy insurance? Like, what do they get in return for that money?

Chris Johnson
So essentially, what they get is really access to a home a lot quicker. That’s how I always describe it. Because when I was in lending, people would say to me,because of course there’s a premium involved, do I have to get this, or can I wait and avoid it? And the reality is, if you wait too long, you’re actually missing out on a huge opportunity. Because, like you said, Clinton, you have to save 20% right? So that can take a long time. In fact, it could be years and years of saving. It could be decades. Really, it could be decades, especially with house prices being where they’re at now. They’re much more expensive in many markets, and so it’s more down payment. So high ratio mortgage insurance allows people to get in with as little as 5% down and get access to being a homeowner versus saving for that 20% . You look in Halifax, for example, I coming in today, I look to see what the average insured mortgage with Sagen is, and it’s $490,000 in Halifax. So if you wanted to buy that home with 20% down, $98,000 down payment, versus $24,500.

Clinton Wilkins
Which is huge, and really it’s gonna enable, like a whole other category, of buyers to get in. And you know, even in 2019, we had done so many pre approvals, and clients just are so adverse about paying the insurance that they’re like, “Oh, I’m gonna wait.” Well, those buyers that didn’t buy in 2019 and then are gonna buy in 2024, 2025 huge, huge spread. And I think in some cases, they just gave up on the 20% down, and they’re getting a high ratio mortgage anyway. But how much further ahead of the game would they have been in terms of building their net worth, in terms of building their assets, if they would have bought in the moment? And it’s just shocking to me.

Chris Johnson
And the other thing people don’t often know going into it is you can add that premium, at least in the province of Nova Scotia. It does vary across the country, but in Nova Scotia, you can add it right into your mortgage. So it’s not like you have to write a check for that amount. You basically can add it into your mortgage and pay it off over as you pay off your your mortgage.

Clinton Wilkins
Great. And essentially, the first dollars these customers are are paying down is really the cost of the insurance. That’s the way that I position it to them. It’s very different in the US, though, in the US, you pay a premium almost on every payment, but here, it’s an amount that’s capitalized, and you can pay it down, which I think is, is great. Now there’s been lots of noise in the media around high ratio insurance. I know we kind of tease that a little bit, and some changes that are coming. So, Chris, you know where I think we’re still waiting for some of these finite details, but maybe give us a high level overview of some of these commitments that the federal government has come out that’s going to impact Sagen and really, homebuyers.

Changes in High Ratio Mortgage Insurance Policies

Chris Johnson
So one thing I’ve been 19 years, earlier this month with Sagen, and in that 19 years, one thing I’ve learned is change is a constant. And you know that from your many years of mortgages, so you got to just fasten your seat belt and hold on for the ride, because there’s lots going on. But the pendulum swings, and the pendulum swings. And in this case, this is actually the changes that have been announced are, I really refer to them as enhancements to what we’ve got now, because what it’s doing is allowing for certain buyers, so first time home buyers who are buying either a new construction or as of December 15, when the changes roll out, also resale property to extend up to 30 year amortization. Right now for insured mortgages, it’s 25 years, right? So that’s going to help to lessen that payment impact a little bit affordability, of course, is everywhere with prices going up, people are looking for any way to save on their bi weekly or monthly payments, so that’s going to be a huge help for those first time buyers. But the December 15 changes also extend to people who aren’t first time home buyers, if they’re buying a new construction. So really, it’s going to allow all Canadians to get access to to that as well. So it’s, it’s exciting news for people to be able to see that.

Clinton Wilkins
So when we’re hearing all these struggles around affordability and clients, you know, qualifying, when we talk about the stress test, having the longer amortization, is going to help?

Chris Johnson
No question, absolutely. I mean, it’s going to help. When you look at the average payment difference, it it’s certainly going to lessen the payment burden for people. But I think the other thing, and you mentioned earlier, through the pandemic, there was a lot of media around, ‘people can’t afford this, or they can’t afford that.’ I think it’s these steps in that direction are going to get people who’ve maybe been sitting on the sidelines to go back and run those numbers again and say, okay, you know what? Maybe this is a time for me to go back and see if this is something that I can do. And because they are, they have changed.

Dan Ahlstrand
So what’s the definition of a first time homebuyer? Is it somebody that’s never owned a property before? Or does that change, depending on on the circumstance, generally?

Chris Johnson
There’s actually a sort of a specific definition, which I would implicate myself without having it to read right now, but there’s very much a specific sort of bullet points of what you need to qualify for that. So that would be where you’d want to make sure you talk to a professional about whether you qualify for it.

Clinton Wilkins
Some of the writing on these policy changes still haven’t rolled out, so we’re not really even 100% sure on what the constraints are going to be. I know from even the federal government perspective, when we talk about things like the RRSP withdrawal program, the home buyers plan, if someone had been separated or divorced, even if they’ve owned a home before, they’re able to qualify as a first time homebuyer. So I’m going to be curious if those same rules are going to apply in your sphere with the high ratio insurance. So I guess we will be staying tuned. I’ll be very interested to see, really, what rolls out by the time that launch happens here in December.

Chris Johnson
Yeah it’s exciting, and beyond the 30 year Am, another announcement that just came out. Anybody purchasing a home over a million dollars has always been limited to having to put down 20%, that’s changing on December 15 to go up to $1.5 million. So certain markets are going to be more impacted by that, like the GTA, no question. Yeah, you go to the larger centers, but you know your average house price, even here in Halifax now, is is up into the high fives. Now, we’ve still got a ways to go to the million, but we do have million dollar properties around here, and certainly those north of that. So for those people who might, for financial planning reasons, maybe put less down, or want to put less down, it’s an option for them now. So we’ll see what the impact of that will be.

Clinton Wilkins
By and large, borrowers get a better price on a mortgage in terms of an interest rate with a high ratio insured mortgage typically, at least from my perspective, if they have the insurance that is really taking a lot of the risk off of the lender, and they are able to potentially package the deals and sell them in the background to get, you know, customers, a lower interest rate. So the optics of the actual transaction may become more interesting. You know, starting soon, around the interest rate, around the insurance so we’re certainly going to be having some different conversations, I think, with borrowers, and we’re having right now, at least from my, perspective.

Differences Between Mortgage Insurers

Dan Ahlstrand
Chris, obviously, if we explained that, you know, if you’re under 20% you have to have this, this product, attached to your mortgage, and there’s only three companies in the country that do it. Is there? Is there a reason why that there’s only three?

Clinton Wilkins
And is there a difference between the three?

Chris Johnson
Yeah, really great question. So this is something that goes way back to just after World War Two, where the federal government actually created, and I’m sure this is a name a lot of people will know, CMHC. So Canada Mortgage and Housing Corporation, and for a number of years, they were really the only mortgage insurer that had access, really to provide any kind of high ratio. And then Sagen, in which, at that time, was actually called something different, GE mortgage insurance backthen. And we were the first private insurer to come in and really kind of mix things up a little bit and sort of bring in some new products, some new ideas. And that sort of really created a bit of a runway for the third private to come in and offer similar types of services at the end of the day, we insure the lender. So when you think of insurance, often you think about the someone getting insurance on like the borrower. So we we sort of grant access to a to a buyer to get into the home. But ultimately, default insurance, which is what we do, is insuring the lender. So if there is a default in the mortgage, so if there’s a foreclosure or somebody can’t pay their mortgage anymore, essentially, what we do is step in and a claim is made to the default insurer, and then we work with the lender, essentially to pay them back any less than they have. So it’s a risk control thing here in Canada, where anybody who has less than 20% down, we do have not only someone to insure it, but another set of eyes to underwrite it, which is really, when you look back to the financial crisis years and years ago, we came out of that extremely well. And I think a lot of the reason for that is how we’re set up here in Canada.

Clinton Wilkins
And I think the insurers have a stake in this too. It’s not just the lenders working on their own. You know, if things are going wrong, you guys have programs that you can help homeowners, which I think is really important. When we think, even during COVID, people got laid off, you know, they lost their jobs in some cases. And you know, the banks got in and did their deferrals and things like that. But the insurers just work so directly with the lenders, even like, rework, potentially a mortgage, to try to keep homeowners in their homes Absolutely,

Chris Johnson
And that’s something you mentioned earlier. But the differences between insurers, and certainly everybody offers a default program, I can sit here very proudly as a Sagen employee for many years and say that is something Sagen does extremely well, is homeowner assistance. It’s really a customized solution that we work with the lender, sometimes with the customer, in order to be able to see, what can we do to help them? Especially lately, in the last few years of so much going on in the economy and inflation through the pandemic, there’s been a lot of questions around that. So it’s a major value for for customers, for buyers,

Dan Ahlstrand
My question piggybacks on that. We know that the financial situation, particularly here in Nova Scotia, hasn’t been the best. As of late, we’re hearing a lot of people with affordability issues, a lot of people with financial issues. Are you seeing a lot of people defaulting on their mortgages? Are you having to use your products?

Chris Johnson
So far, the actual defaults, because of programs like homeowner assistance, have not spiked in any way as of yet. I mean, obviously we’re still working through this renewal cliff.

Clinton Wilkins
Yeah, I don’t know if it’s actually going to come or not, but I guess I’m optimistic that things are going the right direction.

Chris Johnson
I think because of the fact, like we have the stress test, for example, which won’t get into all the details of that, but it gave a bit of a buffer from an interest rate perspective, and helped get us in a good situation.

Dan Ahlstrand
Because we don’t want to see anybody lose their home, right, of course, and nobody wants to see that. Appreciate your time. We’re going to stop down and take another break. This is Mortgage 101, I’m Dan Ahlstrand and he’s Clinton Wilkins. We’re back in minutes.