In order to find out how the current rate impacts Canadian consumers, we must first identify insured and uninsured borrowers.
Do you have less than 20% down?
Securing an insured mortgage (otherwise known as a high-ratio mortgage) means having less than 20% down, and the mortgage will be backed by the Canada Mortgage Housing Corporation (CMHC),
Genworth or Canada Guaranty.
The insurance premium is a one-time amount added to the final mortgage balance. A mortgage with less than 20% down is required to have insurance. This insurance is also referred to as default insurance
which protects the mortgage lender in case there is a loss in principal balance as a result of a mortgage foreclosure. Both the lender and the insurer need to approve your application. The maximum home
price allowed on an insured mortgage is $999,999. The maximum amortization for an insured mortgage is 25 years.
Qualifying with less than 20% down
All insured mortgages need to qualify using the Bank of Canada’s Conventional 5 year fixed posted rate (also referred to as the Benchmark Rate). The current rate is 5.04%. Once qualified, a mortgage broker will then start to shop the market to get the best financing options. Once the right fit is found, the rate presented is called the Contract Rate, and is what mortgage payments are based upon. Since this is considered a high-ratio/insured buyer, in most cases, the default insurance premium is added to the mortgage balance so the buyer is not out of pocket. However in doing so, this means the buyer is charged the mortgage interest rate on the insurance premium amount. Default insurance protects the lender,
which greatly reduces their risk and why mortgage rates are typically lower for insured transactions.
Do you have more than 20% down?
Securing an uninsured mortgage (otherwise known as a low-ratio/conventional mortgage) means applying for a mortgage that meets one of the following criteria:
• It is a purchase of $1 million or more
• A minimum down payment of 20%
• The purchase of a non-owner occupied single-unit rental;
• Refinancing (i.e. replacing the current mortgage loan with an increased mortgage size)
Qualifying with more than 20% down
An uninsured mortgage is mandatory to qualify using the higher of two rates; the contract rate + 2% OR the Bank of Canada’s 5.04% qualifying rate. Only one level of approval is required, from the actual
mortgage lenders. These mortgages can have 30 year amortizations and have a home value of any size. Conventional mortgages are higher risk for lenders without the protection of default insurance,
hence the rates tend to be slightly higher for a conventional deal.
GOOD NEWS!! The drop from 5.19% to 5.04% now means you can borrow on average
$10,000 more than you could previously!