What is the effect of a CMHC or GE insured (“High-Ratio”) Mortgage?

In Canada, a home buyer or home owner obtaining a mortgage loan where the principal amount of the mortgage is greater than 80% of the value of the property will be required to obtain default insurance for the lender.

This default insurance is typically provided by the Canada Mortgage and Housing Corporation (“CMHC”) or Genworth Canada (“GE”).  A mortgage that requires default insurance is known as a “High-Ratio” mortgage.

Under the Law of Property Act (Alberta), a lender’s recourse for default on a mortgage loan is limited to foreclosing on the land. The lender could not typically sue the borrower for any deficiency after foreclosing on the land, EXCEPT in certain cases which include:

1)      Where the Borrower is a corporation; and

2)      Where the mortgage is a “High-Ratio” mortgage.

Therefore, where an individual has obtained a “High-Ratio” mortgage loan, that individual becomes personally liable for the repayment of the mortgage loan.  The borrower in the “High-Ratio” scenario does not get the protections of the Law of Property Act (Alberta).  If the borrower defaults in repayment of the loan, the lender can foreclose upon the lands AND then sue the individual borrower personally for any further deficiency.

The default insurance provided by CMHC or GE is for the benefit of the lender and helps to protect the lender in the event of mortgage default.  This enables lenders to provide mortgage loans to consumers with as little as 5% down.  In the event of default the lender can recover any deficiency, after foreclosing on the property, through the default insurer.  The KEY thing to remember is that, once the lender recovers its losses from the default insurer, the default insurer then has the right to sue the borrower (as if it were the lender), to recover those losses.

Thus, the effect of a High-Ratio mortgage is, essentially, to make the individual borrower personally liable to repay the loan, and to allow the lender to sue the borrowers IN ADDITION to foreclosing on the land.

KH/Dunkley Law Group

Written by Khalil Haji

Khalil is the principal lawyer of KH/Dunkley Law Group. He graduated as a gold medalist from the University of Calgary’s Haskayne School of Business, and then went on to obtain his Bachelor of Laws degree from the University of Western Ontario (graduating in 2007). After he graduated from the University of Western Ontario, he practiced law at national firms in both Calgary and Toronto. He opened his own firm - KH Law - in 2010, where he practiced until forming KH/Dunkley Law Group.