There are many terms and options to consider on the complex subject of mortgages. Both lenders and borrowers must know the distinctions between insured, insurable vs uninsurable mortgages. These differences affect the cost and risk of borrowing or lending money for homeownership and mortgage rates. In this blog, we’ll go into the meanings of various mortgage kinds, consider their effects, and talk about how they impact lenders and borrowers in the Canadian real estate market. We’ll also look at how CMHC guarantee fees and mortgage-backed securities (MBS) have shaped the mortgage market, which will provide important information for anyone looking to finance real estate.
What is an Insured Mortgage?
An insured mortgage involves obligatory insurance, usually with an initial deposit below 20%. If the borrower defaults on the mortgage or faces foreclosure, this insurance protects the lender.
Due to the lender’s reduced risk, insured mortgages usually have attractive interest rates. The borrower is still liable for paying the insurance premium.
The following are the fundamental requirements for an insured mortgage:
- Premiums for insurance must be paid by the borrower.
- It applies to mortgages with loan-to-value (LTV) ratios between 80.01% and 95%.
- A stress test is performed on the mortgage, which has a maximum amortization duration of 25 years and is based on the base rate of the Bank of Canada.
- Refinances, homes that are not occupied by the owner, and house purchases totaling more than $1 million are excluded.
- It is necessary to have a verified income, a minimum credit score of 600, and manageable debt ratios.
What is an Insurable Mortgage?
Insurable mortgages provide flexible terms that offer insurance as a choice but do not demand it. Unlike insured mortgages, borrowers can choose insurance without being obligated to. The lender pays the securitization premium, despite the slightly higher rates.
Key requirements for mortgages that are insurable:
- The maximum amortization period is 25 years.
- Successfully completed the mortgage stress test.
- Purchase price cap that is less than $1 million.
- Debt ratios and credit scores above 600 are acceptable.
- A 20% down payment is required at a minimum.
What is an Uninsurable Mortgage?
The primary difference between an insured and an uninsured mortgage is that the former cannot be insured, regardless of the borrower’s or lender’s wishes. This is the main distinction between the two kinds.
An uninsured mortgage in Canada does not require the borrower or lender to make any extra premium payments. In contrast, such premiums might be necessary for insured mortgages.
The following are typical scenarios in which a mortgage may be uninsured:
- Acquiring properties with a minimum worth of $1 million.
- Purchasing rental single-unit homes that are not occupied by the owner.
- Refinancing, particularly if you select loans with higher risk profiles.
- Choosing amortization schedules longer than 25 years.
The rates for uninsured mortgages are usually marginally higher than those for insured mortgages.
Comparing Insured, Insurable vs Uninsurable Mortgages
| Insured | Insurable | Uninsurable | |
| Eligible for insurance coverage | Yes | Yes | No |
| Complies with CMHC criteria | Yes | Yes | No |
| Requirement for CMHC insurance premiums | No | No | No |
| Interest rates fall within a moderate range | Moderate | Moderate | Moderately High |
| Property value below $1 million | Yes | Yes | No |
| Property situated within Canadian territory | Yes | Yes | Property is located outside Canada |
| Amortization period not exceeding 25 years | Yes | Yes | Amortization period exceeds 25 years |
| Occupied by the property owner | Yes | Yes | Single-unit property not occupied by owner |
| Applicable for both new purchases and mortgage renewals | Yes | Yes | Increasing mortgage amount during refinancing |
| Meets CMHC standards, including: | |||
| Credit score surpasses 600 | Yes | Yes | Credit score below 600 |
| Gross debt service ratio is 39% or lower | Yes | Yes | Gross debt service ratio exceeds 39% |
| Total debt service ratio remains under 44% | Yes | Yes | Total debt service ratio exceeds 44% |
Understanding the Impact of Insurable vs Uninsurable Mortgages
The interest rate is the primary distinction that borrowers are likely to notice between insurable vs uninsurable mortgages when weighing their options. For both insurable and uninsurable mortgages, borrowers usually won’t pay insurance premiums.
Since the insurance is usually covered by the borrower, insured mortgages often have the lowest interest rates. Next are mortgages that are insured; these have rates that are marginally higher than those of insured mortgages because the lender might pay for the insurance. Mortgages that are not insured typically have the highest interest rates since they are riskier.
Even though these details might not seem like much, they have a big influence on your mortgage rates and total cost.
For example, if you are buying a $500,000 house with a 10% down payment, the mortgage would usually be classified as insured, which means that you, the borrower, would be liable for the CMHC payments.
You might not have to pay CMHC premiums if you raise your down payment to 20%, but your mortgage rate might go up a little. The lender may decide to obtain insurance on its own in this situation.
However, regardless of the size of your down payment, the $500,000 home would be deemed an uninsurable mortgage if it were meant for single-unit rental use. As a result, in this case, your mortgage rates may increase.
It’s critical to realise that, even though insured mortgages frequently have the lowest interest rates, borrowers must pay CMHC insurance charges. A higher down payment on an insurable mortgage can frequently lead to a comparable rate, even though the lower interest rate can partially offset these insurance expenses. For example, even after accounting for premiums, a 35% down payment on an insurable mortgage may result in a rate that is similar to an insured mortgage.
Understanding Mortgage-Backed Securities (MBS) and CMHC Guarantee Fees
Mortgages are insured by lenders for a purpose other than loss prevention, and that purpose is securitization. Putting assets together, such as mortgages, and marketing them to investors is known as securitization.
When these mortgages are provided by lenders licensed by the National Housing Act (NHA), they are known as mortgage-backed securities (MBS), and the CMHC may insure them.
By offering these mortgages for sale as MBS, small lenders can raise money to finance additional mortgages. This is typical of B-lenders such as CMLS, Home Trust, and First National.
Insurance is a basic prerequisite for a mortgage to be considered in an MBS pool. Therefore, the only mortgages that qualify are those that are insured or that are determined to be insurable and then insured. Given the circumstances, opting for mortgage default insurance through either CMHC or a private mortgage insurer in Canada is considered appropriate.
In addition to the MBS guarantee, lenders must pay both mortgage default insurance premiums and CMHC costs.
If an MBS has a CMHC guarantee, investors are more likely to consider it since it guarantees investors’ security of principal and interest, as long as mortgage issuers pay the fees associated with the CMHC guarantee. Two primary criteria affect the fees: the size and duration of the MBS.
A longer MBS term usually entails a larger price. On the other hand, MBS, which included multifamily and social housing loans, would have to pay a smaller insurer fee.
The fact that there is an insurance application cost of 2 basis points or 0.02% of the entire MBS amount, should not be overlooked. Furthermore, insurer fees must be paid in full by any MBS issuer that has annual MBS guarantees exceeding $9 billion.
Conclusion
When looking into mortgage possibilities, it’s important to understand the differences between insured, insurable vs uninsurable mortgages. Lower interest rates are available on insured mortgages, which require insurance for down payments of less than 20%. Mortgages that are insured offer the option of insurance but at a somewhat higher rate. Because of the additional risk, uninsurable mortgages are typically the most expensive.
These differences have a big influence on mortgage rates and expenses. For example, matching insured rates can be achieved by raising the down payment on an insurable mortgage. It’s essential to comprehend mortgage types to make wise judgments.
Understanding MBS and CMHC fees is also crucial. MBS makes small lenders’ funding easier by backing them with insured or insurable mortgages. Issuers are required to pay associated fees even though CMHC guarantees security.
In conclusion, it’s critical to comprehend the complexities of mortgages, whether you’re a lender or a borrower. Join up with your reliable mortgage broker, DwellingIQ, for professional assistance in making these decisions.