What Differentiates Insured Mortgages from Insurable Mortgages and Uninsured Mortgages?
Have you ever wondered why banks promote super low mortgage rates, but when you submit an application to that same bank, the interest rate they approve you at is significantly higher than what they advertise? As confusing as this might be, it is not a form of false advertisement
Unfortunately, navigating through the different types of mortgages and interest rates is not an easy thing to do. What the banks don’t tell you is that their lowest mortgage rates are reserved to mortgages that are, or can be, insured against default.
There are 3 categories to mortgages when it comes to default insurance:
Depending on which category you as a borrower, and your property and required mortgage amount falls under, will help determine what rates may be available to you.
What is an insured mortgage?
An Insured mortgage is a mortgage tends to offer the lowest mortgage rates to the borrower since this default insurance will cover the lender in the event that the borrower defaults on their mortgage and there is a shortfall once the property is sold. Since the borrower pays for this insurance and the lender does not incur any additional costs, they typically extend the lowest rates to these insured borrowers.
In certain instances, mortgage default insurance is mandatory. For example, if a borrower has less that 20% as a down payment when purchasing a property, they will in most cases be required to qualify and pay for mortgage default insurance. When applying for this type of mortgage insurance in Canada, the following insurance companies are most commonly accepted by lenders: CMHC (Canadian Mortgage and Housing Corporation), Sagen (formerly Genworth Financial), and Canada Guaranty.
Not everyone can qualify for mortgage default insurance, as each insurer has minimum qualifying criteria that the borrower needs to fall under. This includes minimum requirements for credit, income-to-debt ratio, and more. It’s also important to note, that mortgage default insurance is only available when purchasing a property and cannot be bought or subscribed to when refinancing a property that you already own.
Here’s a little breakdown about insured mortgages:
● The borrower pays the premium on the default insurance policy
● This type of insurance protects the lender’s investment in the event that you default on the mortgage
● Are mandatory when your down payment is less than 20% and seeking a mortgage from a AAA lender
● There are some private lenders who might lend to you without mortgage default insurance even if you have less than 20% down, but the interest rates are higher
● Although it usually applies to borrowers who require a mortgage to cover between 80.05% to 95% of the home’s purchase price, a borrower can still purchase default insurance no matter what the loan to value (LTV) is
● All mortgage default applications MUST pass the stress-test at the benchmark rate set by the Bank of Canada and can only be amortized up to a maximum of 25 years
● It is only available to owner-occupied properties and not to rental properties
● Are only available on home purchases of under $1,000,000
● Are not available when performing a mortgage refinance. Purchases only.
● The borrower must have a strong credit history and a minimum credit score of 600, thought CMHC recently raised their minimum to 680
● The borrowers must fall within the maximum debt to income ratios (GDSR and TDSR – debt servicing ratios)
● Mortgage default insurance providers: CMHC, Sagen (formerly Genworth Financial), and Canada Guaranty
● The insurance premium can be included in the mortgage and amortized over a maximum period of 25 years
● In Ontario, the HST on the insurance premium cannot be rolled up into the monthly mortgage payments and must be paid at time of closing.
It’s important to note that if you purchase a property along with mortgage default insurance, in the event that you ever switch mortgage lenders in the future for the same property without refinancing your mortgage at a higher amount, you can transfer your insurance policy to the new lender so that you qualify for their rock bottom rates. It is your duty to ensure that your new lender or mortgage broker is aware of this.
What is an insurable mortgage?
And insurable mortgage is a mortgage that is default insured by the lender rather than by the borrower. This means that the lender pays the insurance premium and “back-end insures” your mortgage loan.
Insurable mortgages still require you to qualify and are only available on home purchases that are $1,000,000 or less, and where the borrower has at least 20% as a down payment. Since the mortgage is insured, the lender will usually offer special low rates to the borrower, but since the lender incurs the cost of this insurance those rates are not usually as low as they would be with a “insured mortgage” where the borrower would pay for the insurance premium.
More info about insurable mortgages:
- They are only available as an option on mortgages that are 80% or less of the purchase price of the home
- Only available on new purchases and straight lender switches, not on refinances
- The lender pays the premium, not the borrower, so there is no HST to be paid on closing, and no monthly premium payments to be made
- Rates tend to be slightly higher than for insured mortgage since the lender is incurring costs
- Borrower’s credit and income to debt ratios must qualify
- Mortgage stress-test applies
- In the event of a purchase, the property must be purchase for less than $1,000,000
- In the event of a switch, the property must have been purchased for less than $1,000,000 and no increase in mortgage amount or amortization period has transpired since the original purchase date. Grandfathered rules and conditions may apply
- Only available on owner-occupied home purchases
What is an Uninsurable Mortgage?
An uninsurable mortgage is a mortgage loan that cannot be insured against default. Any mortgage that does not qualify within the guidelines of an insured mortgage or an insurable mortgage is deemed to be uninsurable. A mortgage refinance can never be insured or insurable and therefore is always uninsurable. Purchases and mortgage switches can only be insured or insurable if they fall within the criteria listed above.
Here is some more info about uninsurable mortgages:
- Purchases of $1,000,000 or more, or even purchases of less than $1,000,000 that do not qualify based on the requirements of an insurable or insured mortgage
- Mortgage refinances where you either increase the mortgage amount or increase the amortization period
- Non-owner occupied properties
- Amortized for longer than 25 years
Does Mortgage Insurance Protect Me?
Mortgage default insurance does not protect the borrower in the event of death, illness, or disability. That kind of insurance is called Creditor Life and Disability Insurance which will cover your mortgage payments should you die or become critically ill or disabled.
Mortgage default insurance only protects your lender in the event that you default on your mortgage loan. It guaranties that their investment in the loan will get repaid to them even if you stop paying your mortgage.
If you'd like to know what kind of mortgage and rates you can qualify for, please call Clover Mortgage at 416-674-6222 or email us at email@example.com to speak with a knowledgeable and helpful mortgage broker.