Understanding Insured, Insurable, and Uninsurable Mortgages

There are many things that can affect the rate you are able to get on a mortgage. One of them is Mortgage Default Insurance.

What is Mortgage Default Insurance?

Mortgage default insurance protects lenders against the risk of a borrower defaulting on their loan. This insurance is mandatory for high-ratio mortgages, where the down payment is less than 20% of the home’s purchase price. It allows lenders to offer lower interest rates and extends homeownership opportunities to more Canadians by mitigating the lender’s risk. There are currently 3 providers in Canada: CMHC, Sagen, and Canada Guaranty, all of which have slightly differing insurability criteria. It should be noted here that unlike in the States, in Canada a lender will go after other personal assets in order to pay off the debt, with default insurance only kicking in if your total debts are greater than your assets.  This means you can’t just walk away from your house, as has been done in some cases in the States.

Insured Mortgages

An insured mortgage is one that is protected by mortgage insurance, which is required when a buyer has a down payment of less than 20% of the purchase price. The fee for this varies depending on the amount of your down payment, decreasing with the more you have down. The fee will normally be added on to your total mortgage amount. An insured mortgage will normally carry the best rate, as you have paid the insurance fee separately. The lower rate does not necessarily mean that it is the best or cheapest option, as the fees can easily more than cancel out any interest saved.

Key Points:– Down Payment: Less than 20%– Insurance Premium: Added to the mortgage amount or paid upfront– Benefits: Allows buyers to purchase homes with lower down payments and protects lenders against default

Insurable Mortgages

Insurable mortgages are those that can be insured by the lender, but the insurance is not necessarily mandatory. These are typically conventional mortgages where the buyer has a down payment of 20% or more. Even though the borrower might not be required to get mortgage insurance, the lender can still choose to insure the mortgage to mitigate risk. The lender is able to get a bulk discount on the insurance, due to the amount that they insure. This makes it almost always the better option to take a slightly higher rate without paying the insurance premium yourself. With insurable mortgages, your rate will go down based on your loan to value.

Key Points:– Down Payment: 20% or more– Insurance Optional: Lender might choose to insure the mortgage– Benefits: Potentially lower overall costs and better terms for the borrower due to reduced lender risk– Rental: This option is available for rentals with 2-4 units

Uninsurable Mortgages

Uninsurable mortgages are those that cannot be covered by mortgage insurance. This category includes several scenarios, such as:– Home purchase price of $1 million or more– Amortization period is longer than 25 years (First time homebuyers may be able to get 30 years and insured still)– Refinances– Non-owner occupied properties (i.e., investment properties)Some lenders will charge a higher rate for uninsurable, and some will charge the same for uninsurable and insurable.

Key Points:– No Insurance Available: Must meet specific criteria to qualify for default insurance– Higher Risk: Typically can come with higher interest rates due to increased risk to the lender– Specific Use Cases: High-value homes, long amortizations, refinances, and investment properties with 1 unit

Practical Implications for Homebuyers

1. First-Time Home Buyers often opt for insured mortgages due to lower down payment requirements.

2. Repeat buyers with substantial equity from a previous home, might choose insurable mortgages to avoid paying multiple insurance premiums.

3. Default insurance can be carried over from one lender to another, as long as the original amortization remains the same, and no additional equity is withdrawn.

4. If a property is refinanced (equity withdrawn), it becomes an uninsurable mortgage. If the mortgage is then switched to a new lender, it may be able to be considered insurable.

Conclusion

Understanding whether a mortgage is insured, insurable, or uninsurable is crucial for Canadian homebuyers. Each type has its own set of requirements and implications for down payments, interest rates, and eligibility. By knowing the differences, you can better navigate the mortgage process and find the right fit for your financial situation.

If you’re looking for expert advice tailored to your specific needs, consider reaching out to a mortgage broker. They can help you understand your options and find the best mortgage solution for your homeownership journey.