Insured mortgage? Uninsured mortgage? What does this mean?
Do you have less than 20 per cent down?
Securing an insured mortgage (otherwise known as a high-ratio mortgage), means having less than 20 per cent down, and the mortgage will be backed by the Canada Mortgage Housing Corporation (CMHC), Genworth or Canada Guaranty.
A mortgage with less than 20 per cent down is required to have insurance. The insurance premium is a one-time amount added to the final mortgage balance. This insurance is also referred to as default insurance, which protects the mortgage lender in case there is a loss in principal balance as a result of a mortgage foreclosure.
Both the lender and the insurer need to approve your application. The maximum home price allowed on an insured mortgage is $999,999. The maximum amortization for an insured mortgage is 25 years.
Qualifying with less than 20 per cent down
All insured mortgages need to qualify using Bank of Canada’s conventional five-year fixed posted rate, also referred to as the benchmark rate. The current rate is five per cent.
Once qualified, a mortgage broker will then start to shop the market to get the best financing options. Once the right fit is found, the rate presented is called the contract rate, and is what mortgage payments are based upon.
Since this is considered a high-ratio/insured buyer, in most cases, the default insurance premium is added to the mortgage balance so the buyer is not out of pocket. However, in doing so, this means the buyer is charged the mortgage interest rate on the insurance premium amount.
Default insurance protects the lender, which reduces its risk and that is why mortgage rates are typically lower for insured transactions.
Do you have more than 20 per cent down?
Securing an uninsured mortgage, otherwise known as a low-ratio/conventional mortgage, means applying for a mortgage that meets one of the following criteria:
• It is a purchase of $1 million or more
• A minimum down payment of 20 per cent
• Purchase of a non-owner occupied single-unit rental
• Refinancing (i.e. replacing current mortgage loan with an increased mortgage size)
Qualifying with more than 20 per cent down
To qualify for an uninsured mortgage, it is mandatory to use the higher of the two rates; the contract rate plus two per cent or the Bank of Canada’s 5.25 per cent qualifying rate. These mortgages can have 30-year amortizations and have a home value of any size.
Conventional mortgages are higher risk for lenders as they are without the protection of default insurance, hence the rates tend to be slightly higher for a conventional mortgage.
Cait Holmes is a mortgage broker in the qathet region.
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