Thursday, January 29, 2009

Overcharging for Mortgage Insurance?

The latest federal budget promised to “propose new measures to ensure that Canadian consumers are charged no more for mortgage insurance than the true cost of obtaining that insurance.”

When your down payment on a house is less than 20% of the purchase price, you normally have to pay for insurance provided by the Canada Mortgage and Housing Corporation (CMHC). If you default on your mortgage, CMHC covers the bank’s losses.

Like many items in the budget document, the meaning here is not entirely clear. My best guess is that the budget seeks to stop lenders from unreasonably marking up the cost of insurance provided by CMHC. CMHC provides a table of rates that makes it easy enough to check what you should be paying, but maybe few people actually bother to check.

It never occurred to me that banks would do anything but add the exact amount of the CMHC premium to the mortgage principal. But, I guess that isn’t a very good way to run a business. Adding service charges are a core competency of banks.

Another possible interpretation of the budget language is that the government intends to overhaul the CMHC premiums, but this seems unlikely.

Are there any readers out there with direct experience with being overcharged for CMHC mortgage insurance?


  1. Over charging for mortgage insurance never occurred to me but knowing our banks, they'd have a service fee for breathing the air in their buildings.

    TD just sent a letter to my fiance about charging a yearly inactive fee on her LOC.

  2. mfd: Ellen Roseman recently had a post about the TD inactive unsecured LOC fee. The post had thoughts from several different people in the comments section. Check this link if you're interested.

  3. Hi Michael,

    This isn't so much a comment on this particular article as a question on insurance in general...

    Have you considered writing articles on life insurance? I find the whole field a bit baffling myself.

  4. Patrick: The only kind of life insurance I've ever had is term life insurance, which is fairly uncomplicated. Various forms of permanent life insurance like "whole life" and "universal life" are indeed quite baffling. My suspicion is that all the confusion exists to distract people form the fact that these are bad deals for the customer and pay handsome commissions to the salespeople. I haven't investigated enough to call this any more than a suspicion at this point.