Date Posted: November 15, 2018
The days of assuming low mortgage debt loads means less of a credit risk to the lenders and banks are in the past. Banks and lenders now consider those with less of a down payment and who have obtained mortgage default insurance (through CMHC, Genworth, or Canada Guarantee) to be the prime lending candidates. This means that if a borrow puts down less than 20% down payment and therefore pays the default insurance premium to have their mortgage insured against default for the lender, they are willing to, then in turn, provide a lower interest rate to the client. Conversely, those who obtain a mortgage with no default insurance, and therefore no mortgage default protection for the lenders, receive a higher interest rate.
With the rule changes to the mortgage market that started in 2016, there are now 3 levels of mortgages: insured, insurable, and uninsured.
An insured mortgage follows the subsequent guidelines- home value under $1 million, less than 20% down-payment, a maximum amortization of 25 years, and is not a single unit rental property. In this category, the borrower pays the insurance premium which is added on to the mortgage amount and amortized over the duration of the mortgage.
The next category is known as insurable mortgage. It follows similar guidelines to insured mortgages in that the home value cannot exceed $1 million and a maximum amortization of 25 years. However, in this category, the borrower has more than 20% down payment and the property can be a rental with 2-4 units. In this scenario, the lender pays the insurance on your behalf and therefore your rate is higher than the previous scenario of borrower paid insured mortgages.
The last category is an uninsurable mortgage. This is a mortgage with a home valued over $1 million, an amortization of 30 years, a mortgage that is (or has been) refinanced, and single unit rentals.
This is the highest rate category as the lender is not able to obtain the insurance.
This results in those who have less than 20% down payment receiving the best interest rates. This is reverse way of thinking from the traditional mortgage rate scenarios which rewarded borrowers with more equity and down-payment better interest rates as they were seen as less of a credit risk. In today’s market, less risk means having default insurance or the ability to insure the mortgage.
Wondering where you might be in terms of mortgage rates? Contact your Mortgage Broker today for a comprehensive look at your mortgage and financing needs.