Types of Mortgages

Mortgage rates vary depending on the type of mortgage

In Canada, mortgages are either high ratio (insured) or conventional. The hard border between these two types of mortgages lies at 20%. If you have 5-20% as a down payment, you require mortgage default insurance. If you have more than 20% down, the lenders consider your mortgage to be conventional. The conventional category also has two subcategories, depending on the type of lender. Monoline lenders (lenders that have no brick and mortar branches), distinguish between insurable and uninsurable mortgages. Banks tend to only have conventional mortgages, but charge extra for amortizations longer than 25 years.

Type 1: Insured mortgages

The type of mortgage with which most borrowers are most familiar is the insured mortgage. Few first time home buyers have more than 20% to put down. The rates are the lowest because the lender is passing the risk off to the mortgage default insurer. All high ratio mortgages require mortgage default insurance. This is available only for purchases less than $1M. The premium is added to the mortgage principal, so although the rate is lower, the APR is actually higher. The premiums vary with the percentage of down payment according to the table below:

* from Sagen

Although the lenders add mortgage default insurance premium to the principal, they do not add the  Ontario provincial sales tax. Borrowers pay the sales tax at the lawyer’s office when they sign. 

Type 2: Conventional (insurable) mortgages

Another type of mortgage are the insurable mortgages. Lenders consider purchases for less than $1 million, with more than 20% down and a 25 year amortization, to be insurable mortgages. The lenders either self-insure or pay for mortgage default insurance. This is an important distinction between insured and insurable mortgages. The borrower pays the mortgage default insurance in an insured mortgage, but the lender pays the premium in an insurable mortgage.  

There is also a difference between banks and monoline lenders. Because monoline lenders are paying for the mortgage default insurance premium, they offer different rates depending on the amount of the down payment. If a borrower has 35% or more as a down payment, in general the rates available are the same as for an insured mortgage. On the other hand, banks offer just one rate for conventional mortgages, as they self-insure. Banks also have the luxury of being able to consider only total debt servicing on insurable files. In contrast, monoline lenders consider gross debt servicing (principal, interest, taxes and heat) in addition to the total debt servicing. This means, for clients with little debt, they can extend their buying power by placing the mortgage with a bank if they have a large down payment. I have access to 3 banks: Scotia, TD and HSBC.

Type 3: Conventional (uninsurable) mortgages

If you’ve been paying close attention, you should be wondering about refinances, amortizations of 30 years and purchases over $1 million. Lenders will also work with these uninsurable files. Because the lenders are not able to pass the risk off to someone else, they charge the highest interest rate on these files. Lenders also mitigate their risk by having a sliding scale for the amount of down payment required. For example: 20% of the first $1 million, 40% of the balance.

In general banks do not distinguish between insurable and uninsurable, but do charge a premium of 0.1% for amortizations longer than 25 years. The banks that I work with, also only consider total debt servicing for uninsurable files.

In conclusion, the mortgage landscape can be confusing. There are a variety of types of mortgages depending on individual circumstances. As a trusted mortgage partner, I can help you get the right product for your circumstances and goals. Feel free to call me at 249-353-3278 or email me at bturner@nextdayapprovals.