In the past typically one would be rewarded with a possible lower rate for achieving a down payment of 20%. However with recent changes in mortgage rules many lenders now have a higher rate for mortgages that are uninsured or uninsurable.
In the past mortgages were looked at as high ratio (less than 20% down) and conventional (20% or more down). Now mortgages are looked at as insured, insurable and uninsurable. Each with a different possible interest rate.
Let’s review these terms further.
High ratio: Those with a down payment of less than 20% and a mortgage insurer cost such as a CMHC premium charged to the client.
Conventional: Down payment of 20% of more. No mortgage insurer cost to the client. Mortgage may or may not be insured by the lender.
Insured: A mortgage, regardless of the down payment amount that has mortgage insurance paid for by the client.
Insurable: A mortgage that is bulk insured by the lender at their expense, the mortgage qualifies with insurer guidelines and has a down payment of 20% or more. Example insurer guidelines are an amortization no longer than 25 years, benchmark rate used for qualifying, property valued at less than $1,000,000 and so on.
Uninsurable: A mortgage that does not meet mortgage insurer guidelines. For example, refinances, rental properties, amortizations of more than 25 years, properties valued at $1,000,000 or more.
Insured mortgages will have the most favourable rate followed by insurable mortgages. Uninsurable mortgages will see the least favourable rates.
As an example, one major bank is currently offering 3.14% for an insured mortgage, 3.24% for an insurable mortgage, 3.34% for an uninsurable mortgage and 3.39% for a rental property.
As you can see there is a lot of details that go into a mortgage interest rate now.
Some of the government mortgage rule changes that stimulated these changes are the increase to mortgage insurer fees that took place March 2017 as well as a change in October 2017 that prohibited lenders from being able to purchase insurance on conventional mortgages. Lenders needed to increase the cost as a result of this which results in higher rates.
With an insured mortgage, the mortgage insurance is there to protect the lender against mortgage default, fraudulent activity and other challenges that may arise.
For an insurable and uninsurable mortgage the borrower pays a higher rate which assists the lender in having their own insurance premium and reducing their risk.