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Insured, Insurable & Uninsurable Mortgages – What’s The Difference?

You’re probably familiar with the difference between a variable and fixed rate mortgage. You may even be able to tell an open mortgage from a closed one. But do you know what sets insured, insurable, and uninsured mortgages apart?

 

High-ratio and Conventional

It wasn’t too long ago that in Canada there were two types of mortgages, high-ratio and conventional. Conventional mortgages were any mortgage when you had a down payment of 20% or more, and high-ratio mortgages were for any down payment amount under 20%.

High-ratio mortgages were required to get mortgage insurance provided by one of these three companies: Canada Mortgage and Housing Corportation (CMHC), Genworth Financial or Canada Guaranty. Conventional mortgages didn’t have to get insurance, and until recently also didn’t have to be subject to the stress test.

But now there are three types. Broadly, they can still be referred to as high-ratio and convetional, but high-ratio mortgages are broken down into two new categories.

 

Insured, Insurable, Uninsurable

Insured mortgages

Insured mortgages fall completely into mortgage insurance guidelines. They have:

1.      A down payment of less than 20%

2.      Amortizations shorter than 25 years

3.      A value under $1 million

When you take out an insured mortgage, you have to pay CMHC insurance premiums. The exact amount depends on the size of your down payment, and the more money you have upfront the less you have to pay in CMHC insurance.  

CMHC Premiums

Down Payment as a % of Purchase Price

Premium

5% - 9.99%

10% - 14.99%

15% - 19.99%

20%+

4.0%

3.1%

2.8%

0%

 

Insurable mortgages

Insurable mortgages are very similar to insured mortgages, but the homebuyer has a down payment larger than 20%. In order to qualify for mortgage insurance, they must still have the following:

1.      Amortizations shorter than 25 years

2.      A value under $1 million

While you have to pay your own premiums on an insured mortgages, insurable mortgages become portfolio-insured. That means they become of a lender’s portfolio, which is insured on their dime. You get the benefit of having the lower rates of an insured mortgage but without having to pay for it yourself.

Uninsurable mortgages

Uninsurable mortgages fall outside of mortgage insurer’s qualifications for one reason or another. That could be because they:

a)      Have an amortizations of 30 years, or

b)      Have a home value of over $1 million, or

c)      Are a refinance, or an equity take-out greater than $200,000, or

d)      Are a rental

None of these disqualify you from getting a mortgage at all, unlike not meeting GDS or TDS requirements, but they do disqualify you from insuring those mortgages. You’ll have to pay a higher rate – usually about 30 basis points more.

 

Should I get CMHC for a lower interest rate?

While it’s true you get a lower rate if you insure your mortgage, it’s not always worth it to lower your down payment to take advantage of that.

You can read more about whether or not you should get CMHC even if you have a high down payment here.

 

Do I have to pass the mortgage stress test?

In October, 2017, the federal government ruled that all mortgages had to pass the stress test, not just insured ones. Buyers tried their hardest to pay 20% down so that they didn’t have to qualify at the benchmark mortgage rate set by the Bank of Canada, as having to pass lowers your purchasing power by 15%.

The only way to avoid the stress test is to get a mortgage with a credit union, who aren’t subject to the stress test rules. National banks have to follow the rules set by the Office of the Superintendent of Financial Institutions (OSFI), but credit unions don’t. Just like with deposit insurance, they follow provincial regulations. In Ontario, they report to the Financial Services Commission of Ontario (FSCO), who doesn’t require them to use the Bank of Canada benchmark rate. Some choose to anyway, but others may qualify you at a lower benchmark, or even the contract rate.

Credit union mortgages are still eligible for mortgage insurance, but may have higher rates than banks. It can help to have a mortgage broker working for you to shop rates, or you can do it yourself online. Rates may be slightly higher, but your total purchasing power increases when you don’t have to stress test your mortgage.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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