Prior to the most recent round of Government tinkering, mortgages fell into two classes; high-ratio and conventional. There are now three classes of mortgages in Canada. They are Insured, Insurable & Uninsurable Mortgages. This can be confusing for the average borrower so I think it warrants some explaining.
HIGH-RATIO VS CONVENTIONAL MORTGAGES
High Ratio Mortgage – down payment less than 20% and the borrower was responsible for CMHC fees.
Conventional Mortgage – down payment of 20% or more. Typically, the lender still insured the mortgage but the insurance fee was paid by the lender.
INSURED, INSURABLE & UNINSURABLE MORTGAGES
Insured Mortgage – Down payment of less than 20% and the client pays any CMHC fees. The property must be valued below $1 Million dollars, max 25-year amortization and can’t be a rental property. The qualification rate is the Bank of Canada rate. At the time of this post, it sits at 5.14%.
Insurable Mortgage – Fits all the same guidelines as an insured mortgage but the borrower has more than 20% for a down payment. There will be no insurance paid by the borrower but the lender will likely insure the mortgage themselves. The property must be valued below $1 Million dollars, max 25-year amortization and can’t be a rental property. The qualification rate is 5.14%.
Uninsurable Mortgage – All mortgages that can’t be insured. Examples are rental properties, refinances or equity-take-outs, properties valued over $1 Million dollars and amortizations greater than 25 years.
HOW DOES THIS AFFECT YOUR INTEREST RATE?
The difference between interest rates varies greatly depending on what type of mortgage you have. The order of best rates are:
- Insured Mortgages – lowest interest rates
- Insurable Mortgages – slightly higher than insured rates
- Uninsurable Mortgages – highest rates
The lenders need insurance to protect themselves from foreclosures, fraudulent activities and property value decline. The insured and insurable mortgages have insurance and the uninsurable mortgages don’t.
How did the lenders respond? They need to compensate for the added risk of holding a mortgage without insurance.
Who do you think pays for the risk?
The borrower of course! You pay in the form of higher interest rates.
We are now living in the bizarro world. Borrowers who have diligently saved 20% or more for a down-payment are penalized in the form of a higher interest rate. The borrowers putting down 20% or less get rewarded with the best rates available.
Seems kinda strange, doesn’t it?
Contact your local Dominion Lending Centres mortgage professional so we can help!
Brent – 778-558-5159