What is an Insured Mortgage?

Understanding the concept of an insured mortgage is essential for anyone exploring home financing options in Canada. This type of mortgage allows homebuyers to enter the housing market with a smaller down payment, thanks to the added protection of mortgage default insurance.

Definition of an Insured Mortgage

An insured mortgage is a type of mortgage that requires mortgage default insurance when the upfront payment is less than 20% of the home purchase price. This type of insurance protects the lender from the risk of borrower default, ensuring that the financial institution is covered in case the borrower stops making payments. The insurance premium is typically rolled into the mortgage balance and paid as part of the mortgage payments over time.

Benefits of an Insured Mortgage

• Allows homebuyers to purchase a home with a lower deposit, as little as 5% of the purchase price.
• Protects the lender in case of default, reducing their risk.
• Often provides lower mortgage rates compared to uninsured mortgages due to the reduced risk for the lender.

Who Offers Mortgage Default Insurance?

In Canada, mortgage default insurance is offered by three primary providers:

1. Canada Mortgage and Housing Corporation (CMHC) – a crown corporation.
2. Genworth Financial (Sagen).
3. Canada Guaranty.

These entities help make this type of mortgages accessible, especially for first-time homebuyers and those with smaller upfront payments.

What is an Insurance Premium?

An insurance premium is the cost paid by a borrower for an insurance policy, in this case, default insuranceof mortgage, associated with mortgages. This premium protects the lender in case the borrower stops making payments on their mortgage loan.

For insured mortgages in Canada, the insurance premium is calculated based on the loan-to-value ratio, which is the percentage of the purchase price financed through the mortgage.

Typically, the premium is added to the total mortgage amount and paid over the life of the mortgage as part of the regular mortgage payments. This allows homebuyers to enter the housing market with as little as 5% for their down payment, even if they don’t have the full 20% required for an uninsured mortgage.

What is an Uninsured Mortgage?

For homebuyers who can afford a larger deposit or are investing in higher-value properties, an uninsured mortgage may be the best option. This type of mortgage eliminates the need for default insurance of mortgage, offering greater flexibility for specific types of purchases.

Definition of an Uninsured Mortgage

An uninsured mortgage is a type of mortgage that does not require the mortgage insurance. Unlike insured mortgages, this option typically demands a deposit of at least 20% of the home purchase price, ensuring the lender assumes less risk since the borrower has more equity in the property.

This makes uninsured mortgages an ideal choice for those who can afford a larger down payment or are purchasing higher-value properties.

When Would You Need an Uninsured Mortgage?

An uninsured mortgage is required or preferred in the following situations:

• When purchasing a property valued over $1 million (default insurance is not available for such properties).
• When buying a second home not intended for use by immediate family members.
• When purchasing an investment property, such as a rental property or secondary real estate asset.
• When opting for a longer amortization period, up to 30 years, as insured mortgages have a maximum of 25 years.

Can I Get an Uninsured Mortgage for an Investment Property?

Yes, uninsured mortgages are often used for investment properties since they allow buyers to bypass the default insurance of mortgage. This flexibility makes them a popular choice for real estate investors looking to purchase properties intended for income generation or long-term capital appreciation.

Insured vs. Uninsured Mortgages

When navigating the world of home financing in Canada, understanding the distinctions between insured mortgages and uninsured mortgages is crucial. These two mortgage types cater to different financial situations and property purchases, each with its unique benefits and requirements.

Key Differences Between Insured and Uninsured Mortgages

Understanding the key differences between insured and uninsured mortgages can help you make an informed decision based on your financial circumstances and property goals. Below are the main distinctions that set these two mortgage types apart.

Down Payment Requirements:

• Insured mortgages require a minimum upfront payment of as little as 5% for properties valued under $1 million.
• Uninsured mortgages, on the other hand, demand a minimum down payment of 20% or more of the purchase price.

Default Insurance:

• Insured mortgages include mortgage default insurance, which protects the lender in case the borrower stops making payments.
• Uninsured mortgages do not require this mortgage insurance, as the higher deposit reduces the lender’s risk.

Property Eligibility:

• Insured mortgages are only available for properties priced under $1 million and must be owner-occupied.
• Uninsured mortgages are often used for investment properties, rental properties, or homes exceeding $1 million.

Amortization Periods:

• Insured mortgages are limited to a maximum amortization period of 25 years.
• Uninsured mortgages allow for longer terms, often up to 30 years, providing lower monthly payments.

Interest Rates:

• Insured mortgages generally offer lower mortgage rates due to the reduced risk for the lender.
• Uninsured mortgages tend to have higher interest rates but offer flexibility for buyers with larger down payments or unique purchase needs.

Which Option Is Right for You?

Choosing between an insured and uninsured mortgage depends on your financial situation, property type, and long-term goals. If you’re a first-time homebuyer or have a limited down payment, an insured mortgage can provide the affordability needed to enter the market.

Alternatively, if you’re purchasing a high-value property or an investment property, an uninsured mortgage may be your best bet for flexibility and control.

Insurable Mortgages: Requirements and Benefits

An insurable mortgage strikes a balance between insured and uninsured mortgages, offering flexibility for certain buyers while maintaining specific eligibility criteria.

These mortgages are for properties that meet particular requirements but do not require the borrower to pay for mortgage insurance directly. Instead, the lender may choose to insure the mortgage loan themselves, reducing risk.

Minimum Down Payment Requirements for Insurable Mortgages

For an insurable mortgage, the minimum down payment is typically 20% of the property’s purchase price. This higher down payment means the borrower is not required to pay for mortgage default insurance premiums, yet the mortgage remains eligible for lender-provided insurance.

Interest Rate Differences for Insurable Mortgages

One of the main advantages of insurable mortgages is that they often come with lower interest rates compared to uninsured mortgages.

Since lenders can opt to insure the loan on their end, their risk is minimized, which translates to more competitive rates for the borrower. This makes insurable mortgages a cost-effective option for eligible buyers.

Amortization Differences for Insurable Mortgages

• Insurable mortgages are restricted to a maximum amortization period of 25 years, similar to insured mortgages.
• In contrast, uninsured mortgages allow for a longer amortization period, often up to 30 years, providing more flexibility with monthly payments.

While the shorter amortization period of insurable mortgages may lead to higher monthly payments, it also results in faster repayment of the total mortgage and lower overall interest costs.

First-Time Home Buyer Programs and Insured Mortgages

Purchasing your first home can feel overwhelming, but Canada offers various programs to support first-time homebuyers, particularly those opting for insured mortgages.

These programs aim to make homeownership more accessible by lowering costs and providing financial assistance.

List of First-Time Home Buyer Programs in Canada

Home Buyers’ Plan (HBP)

• Allows first-time buyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to put toward a down payment.

First-Time Home Buyer Incentive

• Provides a shared-equity loan with the federal government, reducing the mortgage amount and monthly payments.

Canada Mortgage and Housing Corporation (CMHC) Programs

• Offers various affordability programs to support buyers with lower incomes or limited savings, making insured mortgages more accessible.

Benefits of First-Time Home Buyer Programs for Insured Mortgages

First-time homebuyer programs pair well with insured mortgages, offering multiple advantages:

• Lower Down Payment Requirements: These programs often allow buyers to purchase a home with as little as 5% of the purchase price.
• Lower Interest Rates: By reducing the lender’s risk through mortgage insurance, buyers can benefit from more competitive interest rates.
• Increased Affordability: Financial assistance and incentives reduce the upfront and ongoing costs of homeownership.

How to Qualify for First-Time Home Buyer Programs

To take advantage of these programs, first-time buyers must meet specific criteria:

1. Meet the Program’s Eligibility Requirements: Each program has unique conditions, such as income thresholds or property value limits.
2. Have a Good Credit Score: A strong credit history is essential for program eligibility and securing an insured mortgage.
3. Meet Income Requirements: Many programs set limits on household income to ensure assistance is targeted toward those who need it most.

Final Thoughts

Choosing between insured, uninsured, and insurable mortgages depends on your financial situation, property type, and long-term goals. Insured mortgages are ideal for those with smaller upfornt payments, while uninsured mortgages suit buyers of high-value or investment properties. By understanding the benefits and requirements of each option, you can make a confident decision and move closer to achieving your homeownership goals.