You may have heard of the recent announcements made by the Department of Finance. We want to make sure that you understand these changes and how they’ll impact your future mortgage plan and costs. Prior to these changes, mortgages were generally classified as either high ratio (when you have less than 20% cash down payment) or conventional (when you have more than 20% to put down); the amount of your own $ in your home is called “equity”. Now there’s an additional layer separating mortgages into two categories either as insurable or un-insurable.
Insurable Mortgages
Criteria for Insurable Mortgages include: Home being purchased as “owner occupied” and property value of less than $1 million. The maximum amortization is 25 years (used to be 30) and the qualifying rate (the recently implemented by our Can Gov to ensure you can afford if rates increase) is higher. Mortgages are insured by one of 3 “Default Insurance Companies” CMHC, Genworth, or Canada Guaranty. In short, because these mortgages are insured (less risk to lender), the borrowing rates are cheaper than un-insurable mortgages.
Un-Insurable Mortgages
Because these mortgages are not “Insured” (remember, default insurance protects the lender not you) the risk is higher for the lender, thus the rate is higher. All Refinances, Rental properties, Stated-income, and properties valued over $1 million are mortgages that are considered un-insurable. While they cost more, benefits include having a longer (30-year vs 25) amortization period which reduces the repayment amount and borrowers qualify at the lower contract rate vs. having to be “stress tested” at the Bank Of Canada higher rate (as the insurable does).
In Conclusion: The money to fund un-insurable mortgages comes directly from the lender’s funds. This means the lender has full control over qualifying criteria, but it is more expensive. With an insured mortgage, the money is backed by the insurer (CMHC, Canada, Guaranty, Genworth), which means the lender risk is less thus can afford to charge less (lower rate).
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