Jeffrey Wade
Insurable mortgages are those where the lender pays the mortgage insurance premium, offering protection in the event of borrower default. This is sometimes referred to as back-end insurance. Insurable mortgages are considered lower risk, as they meet eligibility requirements set by the insurer, such as loan-to-value ratios and the borrower's credit score. Insurable mortgages are similar to insured mortgages, where the borrower pays the insurance premium, but the rates are typically more competitive as the lender does not incur the cost. Insurable mortgages are not available for non-owner-occupied properties, such as rentals, and are only available on home purchases of $1,000,000 or less.
| Characteristics | Values |
|---|---|
| Down payment | Less than 20% |
| Maximum purchase price | $1.5 million |
| Maximum amortization period | 25 years |
| Owner-occupied | Yes |
| Loan-to-value ratio | 80% - 95% |
| Insurance providers | Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, Sagen |
| Insurance premium | 0.6% - 4% of the total mortgage amount |
| Insurance cost | Rolled into mortgage payments |
| Credit score | Minimum of 600 |
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What You'll Learn
Insurable vs. insured mortgages
Insurable and insured mortgages are two different types of mortgages, with key differences in the down payment, purchase price, amortization period, and insurance requirements.
An insured mortgage, also known as a high-ratio mortgage or transactionally-insured mortgage, is typically required when the buyer makes a down payment of less than 20%. It is characterised by a lower level of equity contribution from the borrower. By Canadian law, these mortgages must be insured against default by one of the three main providers: Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty. The insurance premium, ranging from 0.6% to 4% of the total mortgage amount, is usually added to the borrower's regular mortgage payments. Insured mortgages have a maximum purchase price of $1.5 million and a maximum amortization period of 25 years.
On the other hand, an insurable mortgage is applicable when the borrower makes a down payment of 20% or more. In this case, the lender is responsible for insuring the mortgage through bulk insurance, which helps lower their risk and funding costs. Insurable mortgages have a maximum purchase price of $1 million and the same 25-year amortization period as insured mortgages.
The main distinction between the two lies in who pays the insurance premium. With an insured mortgage, the borrower pays the premium, while for an insurable mortgage, the lender covers the cost, allowing them to offer more competitive rates to borrowers.
It is important to note that the availability of insured and insurable mortgages is dependent on various factors, including the loan-to-value ratio, the borrower's credit score, and the property's value. Additionally, insured mortgages are generally associated with lower interest rates as the risk and expense for the lender are reduced due to the presence of insurance.
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Default insurance
The cost of default insurance is influenced by various factors, such as the size of the down payment, the borrowed amount, and whether it is paid upfront or added to the monthly payments. The insurance premium is calculated based on the borrower's loan-to-value (LTV) ratio, which is the total mortgage amount divided by the property's purchase price. A higher LTV ratio, resulting from a smaller down payment, leads to a higher insurance premium percentage. For instance, a 5% down payment results in a 95% LTV ratio and a 4.00% insurance premium on the total mortgage amount. On the other hand, a 15% down payment, resulting in an 85% LTV ratio, would incur a lower premium of 2.80%.
Mortgage default insurance is provided by private companies, such as Sagen (formerly Genworth Canada) and Canada Guaranty (formerly AIG Canada), as well as by the Canadian government through its Canada Mortgage and Housing Corporation (CMHC). CMHC, established in 1946, is a Crown corporation that aims to improve housing affordability and conditions in Canada. It offers mortgage loan insurance, grants, loans, and other services to assist Canadians in meeting their housing needs and ensuring an adequate supply of affordable housing.
To be eligible for mortgage default insurance, borrowers must meet their bank's lending qualifications and the underwriting standards of the mortgage insurer. The minimum down payment requirement for default insurance depends on the purchase price of the home. For properties valued at $500,000 or less, the minimum down payment is typically 5%. When the purchase price exceeds $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining amount. It is important to note that default insurance is generally not available for purchases over $1 million.
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Loan-to-value ratios
The loan-to-value (LTV) ratio is a measure that compares the amount of money you borrow with the appraised value of the property. It is expressed as a percentage and helps lenders assess the risk of a mortgage for a home purchase or refinance. A lower LTV ratio is preferable as it indicates lower risk for the lender and can lead to more favourable terms for the borrower.
Calculating the LTV ratio involves dividing the loan amount by the appraised value of the property and then multiplying the result by 100 to get a percentage. For example, if you take out a loan of $150,000 to purchase a house appraised at $200,000, the LTV ratio would be 75% ($150,000/$200,000 x 100). Lenders use this ratio to determine a borrower's eligibility for a loan and the interest rate offered. A lower LTV ratio indicates that the borrower has more equity in the property and poses less risk to the lender.
The LTV ratio also helps determine whether a borrower will be required to purchase private mortgage insurance (PMI). PMI is an additional insurance policy that reimburses the lender in the event of default or foreclosure on the loan. Typically, if the LTV ratio exceeds 80%, borrowers may be asked to obtain PMI. This requirement may vary depending on the loan type and the borrower's financial profile.
Different loan types have different maximum LTV ratio requirements. For example, conventional loans usually require a lower LTV ratio, while government-insured loans, such as FHA, VA, or USDA loans, may allow higher LTV ratios. It is important to note that LTV ratios are just one factor among many that lenders consider when assessing a mortgage application. Other factors, such as credit score, income, and debt, also play a significant role in the overall evaluation process.
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Mortgage insurance premiums
In the context of insurable mortgages, mortgage insurance is required when the loan-to-value ratio is between 80% and 95%. This means that the borrower has made a down payment of less than 20% and, therefore, has a lower level of equity in their home. The mortgage insurance premium can be included in the total monthly payment made to the lender or paid upfront at the loan issuance.
It is important to note that mortgage insurance protects the lender and not the borrower. In the event that the borrower falls behind on their payments, the mortgage insurance ensures that the lender is repaid the full amount. Additionally, until 2017, mortgage insurance premiums were tax-deductible, but this is no longer the case.
There are some alternatives to paying mortgage insurance premiums. One option is to increase the down payment to at least 20%, which would eliminate the need for mortgage insurance altogether. Another option is to explore alternative loan options, such as a "piggyback" second mortgage or a VA-backed loan, which do not require mortgage insurance but may have other requirements or costs.
In summary, mortgage insurance premiums are a crucial aspect of insurable mortgages, protecting lenders and providing borrowers with access to loans they may not otherwise qualify for. However, it is essential to carefully consider the costs and alternatives to make informed financial decisions.
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Owner-occupied properties
An insurable mortgage is a loan that requires mortgage default insurance, also known as CMHC insurance. This is due to the lower level of equity the borrower holds in their home. A mortgage must be insured if the buyer makes a down payment of less than 20% when purchasing their home. Insurable mortgages are also limited to a 25-year maximum amortization period and the home's purchase price must be below $1.5 million. The property must also be owner-occupied, meaning the buyer must dwell in it as their principal residence.
When it comes to financing a property, owner occupancy is an important consideration. Loan terms differ based on occupancy type, and lenders often require primary home loan borrowers to sign an affidavit stating they will personally occupy the home for a certain amount of time. Lenders see owner-occupied properties as lower-risk investments, so they offer better loan terms to borrowers who plan to live in their homes. This is why owner-occupied loan terms are so advantageous to borrowers, and it is also the reason why lenders conduct occupancy checks to ensure that borrowers are using the property as stated in their application.
To avoid mortgage fraud, homeowners should take care to prove that they did not originally intend for the property to be unoccupied by the owner. Buyers do not qualify as owner-occupants if they purchase property in the name of a trust, as a vacation or second home, or as a part-time home for a child or relative. To be considered an owner-occupant, the owner must move into the residence within 60 days of closing and live there for at least one year.
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Frequently asked questions
An insurable mortgage is where the lender pays the mortgage insurance premium, and the borrower does not. The lender will usually offer special low rates to the borrower. Insurable mortgages are only available on homes purchased for $1,000,000 or less, and where the borrower has at least 20% as a down payment.
An insured mortgage is where the borrower pays the mortgage default insurance premium, usually because they have less than a 20% down payment. The insurance covers the lender in the event that the borrower defaults on their mortgage. Insured mortgages are generally offered at the lowest mortgage rates.
To get an insured mortgage, you must take out mortgage default insurance from one of the three Canadian providers: The Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty, or Sagen. The insurance premium can be included in your regular mortgage payments and amortized over the length of your mortgage.
Yes, it is possible to switch from an insured mortgage to an uninsured one by increasing your loan-to-value ratio to above 20%. This can be done by accelerating your payments or making a lump sum payment on your mortgage. At renewal time, you can choose to renegotiate your mortgage and switch to an uninsured option.
