Why do mortgages have different rates?
If you are like most homebuyers, your are perplexed when a Mortgage Broker starts talking about the different rates for mortgages. Bottom line is, that rock bottom rate that you see online has many stipulations. Not every
mortgage has the same rate. The reason is the classification of mortgage based on the amount you have for downpayment and the purchase price of the home. This will dictate whether your mortgage will be insured, insurable or uninsurable. Knowing the difference will better prepare you for your next mortgage or renewal. So what’s the difference?
An insurable mortgage will generally have the lowest rate as there is less risk and expense for the lender. If you default, the lender gets paid by the insurer. If the insurer becomes insolvent, the Government of Canada backstops the insurer. Because the risk is minimized for the lender and because the borrower pays the insurance premium (this is added on to the mortgage) the lender’s cost of lending is lower and thus can pass along better rates. An insurable mortgage would apply if a down payment ranged from 5-19.99% down and is a tiered premium system:
For example, if you were purchasing a home for $450,000 with a 10% down payment, the 10% would be subtracted and the insurance premium of 3.10% would added back on:
$450,000 – $45,000 + 12,555* = $417,555 Total mortgage amount
* There is PST (Ontario) on the insurance premium which is due when the house/mortgage closes
Properties for insurable mortgages must be less than $1 million, be owner occupied and clients must qualify based on a 25 yr amortization.
If you have 20% down or more, the purchase price of your home is less than $1 million dollars, and you can qualify based on a 25 yr amortization and the benchmark rate (currently 5.19%) your mortgage could be “insurable”. Similar to an “insured” mortgage discussed above, these mortgages are insured with the difference being the lender pays the insurance premium without additional cost to the client. Lenders purchase bulk insurance on their mortgages (sell them to investors) and this lowers
their funding cost and allows them to pass along better rates to consumers. These better rates however are not as good as the “insurer” rates. An “insurable” mortgage does not apply to a home that is already owned and presented as a “refinance”. A refinance is “uninsurable” which we will discuss next.
An “uninsurable” mortgage applies to all refinanced mortgages, homes that are worth over $1 million, have to qualify at an amortization of over 25 years (up to 30 years) and properties are non-owner occupied. Clients must also have a down payment of 20% or more. While it hardly seems fair, since this mortgages aren’t insurer, the rates are higher. What is important to remember here is that insurance protects the lenders. So despite the larger down payment, the lender is still taking on more risk. As a result, rates on these uninsured mortgages aren’t as good.
The next time you are looking at mortgage rates and reviewing options, remember these general guidelines: If you have 5-19.99% down on a purchase, you will likely be able to get the lowest posted rates out there as these mortgages are qualified as “insured” and are protected.
If you have 20% or more down on a purchase and qualify at the benchmark rate with a 25 yr amortization (property must be purchase for less than $1 million) you will get better rates however not as good as “insurer”. These mortgages are “insurable” and insured by lenders selling the mortgages in bulk to investors, therefore they are less risky.
If you are refinancing your home, or if you are purchasing a property over a million dollars and/or cannot qualify at a 25 yr amortization, your mortgage will be uninsurable. These mortgages represent the highest risk to a Lender and thus higher rates will apply.
As your Mortgage Broker I am always here to find you the best rates and solution possible. With access to over 110 different Lenders, no matter scenario for you!
