There have been massive changes to the mortgage landscape in Canada over the last number of years. In the past, all borrowers generally got the “best” interest rate. It didn’t matter if you were buying a rental property, how much you had for a down payment, or if you were refinancing… everyone got the same rate.
That “everyone gets the same rate” world no longer exists. It’s been replaced by a highly regulated, and structured mortgage market. Government rules, lender securitization, and lenders’ cost of funds, now play a massive part of what interest rate you’ll be offered. Really, it comes down to risk & security.
Here are the 3 differences you need to know:
1. Insured Mortgages
Often referred to as high-ratio mortgages, Insured Mortgages will have the lowest interest rates of all, because there is less risk and 100% government backed security on your mortgage. And because the borrower pays the default CMHC insurance premium, it’s the lowest cost loan a lender can provide. Therefore, these borrowers will always be offered the “lowest” best interest rates.
- Purchase of owner-occupied homes only (N/A on refinances or rental properties)
- Purchase price must be below $1 Million
- Maximum amortization is 25 years
- Generally, have less than 20% down payment
- 600+ credit score
- Strict gov’t income qualification guidelines
2. Insurable Mortgages
Insurable Mortgages are similar to insured mortgages, however in this case the lender pays the CMHC insurance premium to get the government backing on the mortgage. The qualifying rules are generally the same as above, with one big difference… the borrower must have more than a 20% down payment. Because there’s an additional cost to the lender to pay for the CMHC insurance, they pass that along to the borrower in the form of a slightly higher interest rate. Generally, your interest rate would be .05% – .20% higher than “best” rates.
3. Uninsurable Mortgages
These mortgages cover everything else. And that’s a lot! Any purchase price over $1 Million; any rental property purchase; any mortgage refinance, regardless of the type of property; lower credit scores; any approval based on assets, equity or net worth; amortizations longer than 25 years. If your mortgage application encompasses any of these features, it’s considered “uninsurable”. Generally, your interest rate would be .10% – .35% higher than “best” rates.
As you can see this is counter-intuitive logic. Higher Down payments = Higher Interest rates. And yes, that’s true! A borrower with a 5% down payment, gets a lower interest rate than a borrower with a $1 Million down payment on a $1.5 Million home. Welcome to the NEW world of mortgages. One more example of the “life isn’t fair” lesson my mother always tried to teach me about.
Doug Neufeld, BBA, AMP
Senior Mortgage Planner
Dominion Lending Centres – Mortgage Negotiators