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Are you wondering why you may be paying a higher rate on your mortgage than your twenty-something co-worker being a first time homebuyer? Simply stated, the Canadian government and the Chartered banks have decided to support and reward home buyers with less credit worthiness. To understand why, we must look at the three types of mortgages available to consumers.
Today, an Insured Mortgage is one where the value of the home is under $1 million, the down payment is less than 20%, the amortization period is at a maximum 25 years, and the home is not a rental property. A person in this scenario can get a rate as low as 3.49% on a five-year fixed mortgage. The borrower pays the mortgage default insurance premium. Mortgage insurers in Canada are CMHC, Genworth and Canada Guaranty.
Types of Mortgages
An Insurable Mortgage is one where the value of the home is under $1 million, the homeowner puts down more than 20% of the purchase price and the amortization period must be a maximum of 25 years. This person can get a rate as low as 3.89% on a five-year fixed mortgage. The rate is higher because lenders pay the mortgage default insurance premium instead of the borrower.
An Uninsurable Mortgage covers everything else, but is often simply one where the value of the home is more than $1 million. It also includes refinancing an existing mortgage or equity takeouts, or an amortization period up to 30 years. This person can get a rate as low as 3.90% on a five-year fixed mortgage. The rate is the highest of the three scenarios as the lender cannot acquire default insurance for these mortgages. Worth noting that mortgages on homes over $1 million are becoming increasingly harder to get. People in this category face further hurdles at time of renewal…higher renewal rates. Lenders know that in this category, the stringent Stress Test qualifying criteria restricts people from moving to other institutions.
Things to Consider
Finally, this has housing market implications one must consider. If you own a $1 million dollar property, being able to sell it becomes harder. Chances are the people that want to purchase it will have to qualify for a mortgage. The natural market cycle is interfered with by politicians and has put higher costs on people.
