This vs That 7: Insured, Insurable & Uninsurable vs High Ratio & Conventional
Michael Hallett • March 31, 2017
You might think you would be rewarded for toiling away to save a down payment of 20% or greater. Well, forget it. Your only prize for all that self-sacrifice is paying a higher interest rate than people who didn’t bother.
Once upon a time we had high ratio vs conventional mortgages, now it’s changed to; insured, insurable and uninsurable.
High ratio mortgage
– down payment less than 20%, insurance paid by the borrower.
Conventional mortgage
– down payment of 20% or more, the lender had a choice whether to insure the mortgage or not.
vs
Insured
–a mortgage transaction where the insurance premium is or has been paid by the client. Generally, 19.99% equity or less to apply towards a mortgage.
Insurable
–a mortgage transaction that is portfolio-insured at the lender's expense for a property valued at less than $1MM that fits insurer rules (qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%).
Uninsurable
– is defined as a mortgage transaction that is ineligible for insurance. Examples of uninsurable re-finance, purchase, transfers, 1-4 unit rentals (single unit Rentals—Rentals Between 2-4 units are insurable), properties greater than $1MM, (re-finances are not insurable) equity take-out greater than $200,000, amortization greater than 25 years.
The biggest difference where the mortgage consumers are feeling the effect is simply the interest rate. The INSURED mortgage products are seeing a lower interest rate than the INSURABLE and UNINSURABLE products, with the difference ranging from 20 to 40 basis points (0.20-0.40%). This is due in large part to the insurance premium increase that took effect March 17, 2017. As well, the rule changes on October 17, 2017 prevented lenders from purchasing insurance on conventional funded mortgages. By the Federal Government limiting the way lenders could insure their book-of-business meant the lenders need to increase the cost. We as consumers pay for that increase.
The insurance premiums are in place for few reasons; to protect the lenders against foreclosure, fraudulent activity and subject property value loss. The INSURED borrower’s mortgages have the insurance built in. With INSURABLE and UNINSURABLE it’s the borrower that pays a higher interest rate, this enables the lender to essential build in their own insurance premium. Lenders are in the business of lending money and minimize their exposure to risk. The insurance insulates them from potential future loss.
By the way, the 90-day arrears rate in Canada is extremely low. With a traditional lender’s in Canada it is 0.28% and non-traditional lenders it is 0.14%. So, somewhere between 99.72% and 99.86% of all Canadians pay their monthly mortgage every month.
In today’s lending landscape is there any reason to save the necessary down payment or do you buy now? Saving may avoid the premium, but is it worth it? You may end up with a higher interest rate.
By having to wait for as little as one year as you accumulate 20% down, are you then having to pay more for the same home? Are you missing out on the market?
When is the right time to buy? NOW.
Here’s a scenario is based on 2.59% interest with 19.99% or less down and 2.89% interest for a mortgage with 20% or greater down, 25-year amortization. In this scenario, it takes one year to save the funds required for the 20% down payment.
- First-time homebuyer
- Starting small, buying a condo
- 18.9% price increase this year over last
Purchase Price $300,000
5% Down Payment $15,000
Mtg Insurance Premium $11,400 (4% as of March 17, 2017)
Starting Mtg Balance $296,400
Mortgage Payment $1,341.09
Purchase Price $356,700 (1 year later)
20% Down Payment $71,340
Mtg Insurance Premium $0
Starting Mtg Balance $285,360
Mortgage Payment $1,334.40
The difference in the starting mortgage balance is $11,040, which is $360 less than the total insurance premium. As well, the overall monthly payment is only $6.69 higher by only having to save 5% and buying one year sooner. Note I have not even built in the equity that one has also accumulated in the year. The time to buy is NOW.
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Canadian tuxedo.
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If the title of this article caught your attention, chances are your family is growing. Congratulations. If you’re thinking now is the right time to move into a home that better fits your growing family—but you’re unsure how parental leave affects your ability to qualify for a mortgage—you’re in the right place. Here’s the good news. Qualifying for a mortgage while on parental leave is possible when it’s done correctly. When you work with an independent mortgage professional, lenders can often qualify you based on your return-to-work income , as long as you can provide documentation confirming you have guaranteed employment waiting for you. A word of caution If you walk into a bank branch and disclose that you’re currently on parental leave, there’s a chance the bank will only allow you to qualify using your parental leave income. That can significantly reduce your borrowing power. Parental leave income is typically limited to 55% of your previous earnings, up to a weekly maximum. Qualifying on that amount alone can restrict your options and impact the type of home you can purchase. Why lender choice matters One of the biggest advantages of working with an independent mortgage professional is choice . You’re not limited to one lender’s rules or products. Some lenders will allow you to qualify using 100% of your confirmed return-to-work income , which can make a meaningful difference in your approval amount and overall options. What you’ll need to qualify Most lenders will require an employment letter that includes: Employer name (preferably on company letterhead) Your job title Original start date (to confirm probation has been completed) Confirmed return-to-work date Guaranteed salary upon return Lenders want reassurance that your income will resume once parental leave ends. You may also be asked to provide income history from the past couple of years, which is standard for most mortgage applications. One important note Whether or not you actually return to work after parental leave is entirely your decision. From a mortgage perspective, qualification is based on having a confirmed position available to you at the time of approval. If you have questions about qualifying for a mortgage while on parental leave—or anything mortgage-related—please connect anytime. I’d be happy to walk you through your options and help you plan with confidence.
You’ve outgrown your current home. It no longer fits your life, so moving makes sense. And you’re not interested in juggling two properties. Selling first and buying something new feels like the right move. Ideally, you want possession of the new home before leaving the old one. That overlap makes moving easier, reduces stress, and gives you time to paint, renovate, or settle in before the boxes arrive. But there’s a common challenge. What if the down payment for your next home is tied up in the equity of the one you’re selling? That’s where bridge financing comes in. How bridge financing works Bridge financing temporarily unlocks equity from your current home once it has a firm sale . It bridges the gap between selling your existing property and purchasing your next one, allowing you to use that equity toward your down payment. What about competitive markets? In a hot market, a strong offer often means a larger deposit . If you don’t have that cash sitting in your account, but you do have equity, a deposit loan can help you compete with confidence. The non-negotiable requirement To qualify for bridge financing or a deposit loan, your current home must have a firm, unconditional sale . No firm sale = no bridge or deposit loan. Lenders need certainty to calculate available equity and manage risk. Bottom line A firm sale is the key that unlocks bridge financing and deposit loans. If you’re planning a move and want to understand how these options could work for you, let’s talk. I’m always happy to walk you through your options and help you plan your next step with confidence.
