You're Telling Me My Larger Down Payment Gets Me a Higher Interest Rate? That Cant Be Right?!

Yes, a lower down payment may, in fact, get you access to lower rates, but they are not free! This is one of the mind-blowing FACTS in the 2020 Canadian mortgage market. How can putting more of your money get you higher interest rates? Let me break it down for you.

Simple explanation: Lender Risk – How much money can they lose if people can’t/don’t pay the loan back.

The Details not so simple: Typically, lower interest rates are actually caused by their ability to be default insured. It is important to understand this before falling in love with an advertised online rate especially if you are shelling out the cash to cover the premium costs.

Default insurance what is that? – Mortgage default insurance is an insurance policy between the insurer and the lender that will compensate the lender for losses suffered on an insured loan. It’s important to note that mortgage default insurance does not compensate the borrower.

In order to understand default insurance, you must learn about the three main types of mortgages.

Insured

Insurable

Uninsurable

Each of these mortgage types comes with their own borrower requirements as well as a set of rates. It is important to understand where you fit in.

Insured Mortgages

An insured mortgage is a mortgage transaction where the insurance premium is paid by the buyer

• Protects the lender on default, not the borrower

• Mandatory when your down payment is less than 20%

• The property must be worth less than $1 million

• The amortization must be 25 years or less

• The client qualified using the greater of the mortgage contract rate or the BOC benchmark rate

• The property must be owner-occupied

• Require good credit (600 minimum score) – acceptable debt ratios – and provable income

• Mandatory when your down payment is less than 20%

• The cost of the insurance can be rolled into the mortgage and paid off over the amortization period

Insurable Mortgages

An insurable mortgage is a mortgage transaction where the insurance premium is paid by the lender.

• Protect the lender on default, not the borrower

• The property must be worth less than $1 million

• The amortization must be 25 years or less

• The client qualified using the greater of the mortgage contract rate or the BOC benchmark rate

• The property must be owner-occupied

• Only available when the property has more than 20% equity

• The cost of the insurance is paid by the lender

Uninsurable Mortgages

An uninsurable mortgage is defined as a mortgage transaction that does not meet the mortgage insurer rules and is therefore not eligible for insurance. The client qualified using the greater of the mortgage contract rate +2% or the BOC benchmark rate

Some examples

• Purchases over $1m

• Refinances increasing the loan amount and therefore the risk of default

• Non-owner-occupied single unit rentals

• Amortizations of over 25 years

When shopping for mortgages its good to know how these types of mortgages affect rate. To simplify rates as much as possible typically the lower the risk to the lender the lower the rate to the client.

Insured Mortgages - Even though in most cases the down payment is lower than the buyer's contribution from the other two categories, insured mortgages are the lowest risk. The premium is paid by the borrower which costs the lender less. The loan is also protected because it is secured with insurance.

Insurable Mortgages – with down payments of 20% or more the lender will pay the premium for the borrower. The loan is protected because it is secured with insurance however this costs the lender a little extra than an insured mortgage so they recoup this loss by charging a slightly higher rate. This could be 5% to 20% higher depending on the equity in the property.

More equity = lower risk = lower rate.

Uninsured Mortgages- This loan is not protected because it is not secured with insurance. This makes uninsured mortgages the highest risk for lenders and causes the need for the highest rates. These rates are typically 25% higher than those of insured rates.

How much is default insurance? As of the time written prices shown below

Getting a mortgage is a complicated experience where the rate is important however there are many other factors that a majority of buyers don’t understand. Rate is the final piece of the puzzle but understanding the ins and outs, risks, savings and other details should come first.

Please feel free to contact me with any mortgage-related questions or comments.