Mortgage insurance protects a lender’s investment in certain types of loans, which typically come with lower rates but an insurance premium is charged.   Without mortgage insurance, borrowers can sometimes qualify for a larger loan, they can lower their monthly payments relative to the borrowed amount, and they can save on the cost of the insurance premium.

Mortgages are separated into three tiers, each of which have varying insurability:

1) Fully insured mortgages relate to purchases in which borrowers put less than 20% down, the purchase price is less than $1,000,000, and the amortization is set to 25 years or less.  These loans are insured through mortgage default insurance.

Canada has 3 mortgage insurers: CMHC, Sagen and Canada Guaranty.  Insured mortgage premiums are based on a percentage of the loan amount.  The borrower does not pay the premium in advance.  The insurance cost is added to the mortgage balance itself.  And because the loan is insured, and is therefore lower risk to the lender, the rate is typically lower.  Taking an insured mortgage lets you buy with less down and may allow you to purchase sooner than you might saving for a higher down payment.

2) Insurable mortgages relate to purchases where the down payment is over 20%, the purchase price is less than $1,000,000, and the amortization is set to 25 years or less.  Lenders who pay the mortgage premium on these loans still generally offer a lower rate of interest because insured mortgages are lower risk.  Insurable mortgages let you save on interest but the maximum amortization being set to 25 years may mean you will have a higher mortgage payment than you might have with an uninsured mortgage.

3) Lenders generally offer more flexibility on uninsurable mortgages. The amortization on uninsurable mortgages can be greater than 25 years, and the down payment must be more than 20%.  These mortgages can include refinances, longer amortizations, and property values greater than $1,000,000.

Without insurance coverage, lenders charge higher interest rates, though the borrower saves on paying mortgage insurance.  Lenders view these loans as higher risk as they are uninsured, though the borrower will have put more down than they would have on a purchase financed with an insured mortgage.  Taking an uninsured mortgage is sometimes the only option depending on the purchase price or amortization needed, but can often be beneficial in securing a lower payment or more leeway in qualifying.

Weighing the pros and cons across each of these loan types can be circuitous.  Please let me know if you have any questions about your mortgage or on an upcoming purchase, I’m always happy to help.

Adapted from DLC Marketing

Photo by Daniel Olah on Unsplash