The client
A self-employed tradesperson in Drummondville refinanced a $215,000 mortgage with a $35,000 cash-out, at 5.20%.
Existing mortgage balance
$215,000
Cash-out amount
$35,000
Refinance
Home's rebuild cost after addition
$365,000
Per a fresh insurance valuation
Coverage actually carried
$280,000
Never increased after the addition
The problem
A home policy's co-insurance clause requires the insured amount to reach a set share of the property's rebuild cost -- commonly 80% on this type of policy -- or any future claim is paid only in that same proportion, no matter how small the loss. It is a penalty clause, not a coverage cap.
How the gap opened
- ▸A recent addition raised the home's own rebuild cost to $365,000
- ▸The insured amount stayed at $280,000, never increased after the addition -- a deliberate corner-cut to keep the premium down while self-employed cash flow was tight
- ▸The policy's own 80% co-insurance threshold on the new rebuild cost was $292,000, leaving a $12,000 shortfall
No claim had ever been made against the gap. The lender's own funding condition existed precisely so nobody had to find that out the hard way.
The numbers
Once the coverage gap was identified, closing it was a straightforward insurance fix -- the refinance math underneath it never changed.
| The refinance, and the co-insurance gap it surfaced | Amount |
|---|---|
| Existing mortgage balance | $215,000 |
| Cash-out amount | $35,000 |
| New refinanced balance | $250,000 |
| Total debt service | Figure |
|---|---|
| Payment at the qualifying rate (7.20%), 25 years | $1,782/mo |
| Property tax | $275/mo |
| Heat (lender estimate) | $100/mo |
| Car loan | $220/mo |
| Total debt service | 37.1% |
37.1% is informational on this uninsured refinance -- the ratios were never the issue. Self-employed households run tighter cash-flow margins by nature, which is exactly the pattern average new mortgage amount data reflects when it separates self-employed borrowing from salaried. The co-insurance gap, not the refinance itself, was the real risk on this file.
The solution
A courtier hypothécaire licensed under Quebec's Act respecting the distribution of financial products and services treated the co-insurance shortfall as a funding condition in its own right, separate from the self-employed income review.
First, obtained a fresh insurance valuation confirming the $365,000 rebuild cost after the addition, rather than relying on the outdated figure the existing policy was still priced against.
Second, increased the insured amount to clear the policy's own 80% co-insurance threshold, closing the $12,000 gap with a modest, permanent premium increase the household could plan around.
Third, supplied the updated declaration page as the lender's outstanding funding condition, keeping the co-insurance question entirely separate from the income documentation that had already cleared.
The outcome
The refinance closed at 5.20%, with total debt service at 37.1% and the policy's own co-insurance clause no longer exposed to a proportional claim reduction.
Because this file is an uninsured refinance, CMHC's ratio maximums do not apply directly; the 37.1% figure is informational, showing the ratios were never the issue on this file.
What to take from this file
- 01A co-insurance clause penalizes underinsurance proportionally, even on a partial loss. It is fundamentally different from a plain deductible, and worth explaining to a client in those terms.
- 02An addition or renovation raises rebuild cost immediately -- coverage does not follow automatically. Prompt clients to update their insurance valuation whenever the structure itself changes.
- 03Cutting insurance costs during a tight self-employed cash-flow stretch can create a hidden gap. The corner-cut is invisible until either a claim or a lender's funding condition tests it.
- 04Keep the insurance fix separate from the income review. A clean self-employed income file and an underinsured property are two different problems with two different solutions.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸5.20% contract rate — rates move daily; not a quote.
- ▸the 80% co-insurance threshold — each insurer sets its own co-insurance percentage; there is no universal figure.
- ▸the TDS figure — this file is an uninsured refinance, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.