So, you’ve managed to save a large down payment to purchase your new home – at least 20% of the purchase price. Or you’ve decided to refinance your existing mortgage to renovate your basement. But when you go to get a mortgage, the interest rate is higher than if you had only 5% down. And the interest rate is higher for a refinance, even though it’s only 80% of the value of your home. Why?
It comes down to how these mortgage products are insured. The usual high-ratio mortgage vs conventional mortgage has now morphed into insured, insurable and un-insurable mortgages.
Let's review. A high-ratio mortgage has a loan-to-value ratio (LTV) above 80%. Because the risk associated with these loans is higher due to the lower amount of down payment, lenders require the mortgage be insured by one of the three mortgage default insurance companies in Canada.
A conventional mortgage has a loan-to-value ratio (LTV) of 80% or less. So, when you have at least 20% for your down payment or equity in your home, the lender in most cases will not require you to purchase mortgage default insurance on your loan.
That was then, this is now.
Insured Mortgages
This is a mortgage transaction where the default insurance premium is paid by the client, as is typical in a high-ratio mortgage.
Insurable
This type of mortgage can now be considered the new “insured mortgage”. These are still eligible for default insurance but is portfolio-insured at the lender’s expense or high-ratio insured at the client’s expense. There are tougher rules as well – the maximum amortization is 25 years, applicants must qualify at the Benchmark rate and property must be valued at less than $1M. Property must also be owner-occupied.
Un-Insurable
These mortgages are not eligible for default insurance and apply to refinances, rental properties, stated income, and on purchases greater than $1M.
Why the interest rate difference?
Lender risk. Insured and insurable mortgages carry less risk because they are secured through one of the three insurers, which means in case of a mortgage default and subsequent foreclosure, the lender is covered. Therefore, the interest rate tends to be lower.
Which mortgage is best for me?
That depends. Every situation is unique. There are pros and cons for each of the three types of mortgages, depending on your financial goals. For example, sometimes the spread between the insurable and un-insurable rate is significantly large enough to justify the borrower paying high-ratio mortgage insurance to obtain the lower rate.