• Insurable vs Uninsurable Mortgages

    Before discussing the difference between an insurable mortgage and uninsurable mortgage, we should first discuss what an insured mortgage is. Most people have heard of CMHC. They are the government insurance agency that needs to step in and insure a mortgage if the purchaser of the home is putting less than 20% down. There are criteria that need to be met by the borrower to qualify for the insurance. They need to have sufficient income to pass the stress test for example. The amortization of the mortgage cannot exceed 25 years. The size and location of the property need to meet the criteria of the insurance company. It cannot be a refinance.

    What people don’t know is that it is possible to get insurance on a property that somebody is purchasing even when the borrower is putting more than 20% down. Why would anyone want to ensure a mortgage when they don’t have to? It reduces the risk of the lender. And as we have said many times before, reduce the risk and you reduce the rate.

    Thus, even though it is not mandated as it is for purchases where the down payment is less than 20%, some lenders will pay for the insurance themselves anyway (or will pass along the cost of the insurance to the borrower – watch for that), and then offer the borrower rates that are comparable to high ratio rates. This is an insurable mortgage; one that can qualify for default insurance, but where it is not mandated by the government. Purchases and switches (where you move your mortgage to another institution without changing the amount) are the most common insurable mortgages. As mentioned above, refinances are not insurable and that explains why the rates for refinancing are generally not as good as the rates for purchases, because the lenders cannot reduce their risk by placing insurance on the mortgage.

    The exception to this rate disparity are the balance sheet lenders like Scotiabank and TD. Their refinance rates can be comparable to their purchase and switch rates because they are lending their “own money”. Whereas the smaller mortgage companies rely on investors that are more leery about risk!

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