Understanding Insured, Insurable, and Uninsured Mortgages: What’s the Difference?
When navigating the world of mortgages, you’ll come across various terms that might seem confusing at first. Among them are "insured," "insurable," and "uninsured" mortgages. Understanding these distinctions is crucial for both first-time homebuyers and seasoned property investors. This blog will break down these terms, provide examples, and help you understand how each type can impact your mortgage options.
What is an Insured Mortgage?
An insured mortgage is one that is backed by mortgage insurance, which the borrower must purchase. This insurance protects the lender in case the borrower defaults on the loan. In Canada, mortgage insurance is typically provided by the Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), or Canada Guaranty.
When is a Mortgage Insured?
A mortgage becomes insured when the down payment is less than 20% of the home’s purchase price.
The insurance is mandatory to mitigate the lender's risk, as a lower down payment means higher risk.
The borrower pays a mortgage insurance premium, either upfront or added to the mortgage amount.
Key Features of Insured Mortgages:
Mandatory Insurance: Required for down payments below 20%.
Lower Down Payment: Insured mortgages allow borrowers to purchase a home with as little as a 5% down payment.
Mortgage Insurance Premium: Borrowers pay a premium for this insurance, which can be added to the mortgage amount or paid upfront.
Lower Interest Rates: Because the lender is protected by insurance, they often offer lower interest rates compared to uninsured mortgages.
Example:
Imagine you’re buying a home in Toronto for $600,000, but you only have a down payment of $30,000 (5%). Since your down payment is less than 20%, your mortgage would need to be insured. In this case, you’d pay a mortgage insurance premium to a provider like the Canada Mortgage and Housing Corporation (CMHC).
What is an Insurable Mortgage?
An insurable mortgage is one that qualifies for mortgage insurance, even if the borrower doesn’t need it or chooses not to pay for it. Typically, these mortgages meet specific criteria such as a loan-to-value ratio (LTV) of less than 80%. The key difference from insured mortgages is that the insurance is optional, and often, it is the lender who may choose to insure the mortgage, not the borrower.
When is a Mortgage Insurable?
A mortgage is considered insurable if it meets eligibility criteria, typically with a down payment of 20% or more.
The borrower is not required to purchase insurance, but the lender may choose to insure the mortgage to mitigate risk.
This option can lead to more competitive interest rates, even though the borrower does not pay for the insurance directly.
Key Features of Insurable Mortgages:
Optional Insurance: The mortgage qualifies for insurance, but it’s not mandatory.
20% Down Payment: Usually involves down payments of 20% or more.
Potentially Lower Interest Rates: Because the mortgage is eligible for insurance, lenders may offer more competitive rates, knowing they can insure the loan if needed.
No Upfront Insurance Cost to Borrower: The borrower doesn’t have to pay an insurance premium unless they choose to insure the mortgage themselves.
Example:
Suppose you’re purchasing a home for $500,000 with a 20% down payment, resulting in an $400,000 mortgage. This mortgage is insurable, as it meets the lender’s criteria for insurance. Even though you’re not required to pay for insurance, the lender might choose to insure it to reduce their risk, potentially passing on some of the savings to you in the form of a lower interest rate.
What is an Uninsured Mortgage?
An uninsurable mortgage is one that does not qualify for mortgage insurance, either because it doesn’t meet the insurer’s criteria or because the type of property or mortgage itself is excluded from coverage. These mortgages generally carry more risk for the lender, which can result in higher interest rates or more stringent lending criteria.
When is a Mortgage Uninsurable?
A mortgage is uninsurable if it fails to meet the eligibility criteria for insurance, such as certain loan amounts, amortization periods, or property types.
Examples include properties priced over $1 million, mortgages with amortization periods longer than 25 years, or refinances that exceed specific thresholds.
The borrower cannot purchase insurance for these mortgages, and the lender must bear the full risk.
Key Features of Uninsured Mortgages:
No Insurance Coverage: These mortgages do not qualify for insurance, meaning the lender takes on all the risk.
Higher Down Payment Required: Generally, requires a down payment of 20% or more.
No Mortgage Insurance Premium: Since the mortgage is not insured, there is no premium cost to the borrower.
Potentially Higher Interest Rates: Lenders may charge higher rates because they are taking on more risk without insurance.
Restricted Loan Terms: These mortgages may come with stricter terms or conditions due to their uninsurable nature.
Example:
Consider you’re buying a condo in Ontario for $800,000 and you have a down payment of $160,000 (20%). Your mortgage amount would be $640,000, and since you’ve met the 20% threshold, this mortgage would be uninsured. You won’t have to pay for mortgage insurance, but the lender might offer a slightly higher interest rate compared to an insured or insurable mortgage.
Summary of Differences
Who Pays for the Insurance?
Insured Mortgage: The borrower pays for the insurance premium.
Insurable Mortgage: The lender might pay for insurance, but the borrower is not required to.
Uninsurable Mortgage: No insurance is available; the lender bears all the risk.
Down Payment Requirements:
Insured Mortgage: Typically requires a down payment of less than 20%.
Insurable Mortgage: Usually involves a down payment of 20% or more.
Uninsurable Mortgage: Often involves a down payment of 20% or more, but not necessarily.
Interest Rates:
Insured Mortgage: Often lower interest rates due to insurance coverage.
Insurable Mortgage: Can offer competitive rates, depending on the lender’s decision to insure.
Uninsurable Mortgage: Generally higher interest rates due to the lack of insurance.
Property and Mortgage Type Restrictions:
Insured and Insurable Mortgages: Subject to specific eligibility criteria.
Uninsurable Mortgages: May include properties over $1 million, longer amortization periods, or other criteria that disqualify them from insurance.
Choosing the Right Option for You
Understanding the differences between insured, insurable, and uninsured mortgages can help you make more informed decisions when purchasing a home.
First-time buyers with smaller down payments might benefit from insured mortgages due to lower interest rates, even with the additional cost of insurance.
Buyers with larger down payments might lean towards uninsured mortgages to avoid paying insurance premiums, though it’s important to shop around for competitive interest rates.
Savvy investors or repeat buyers might find insurable mortgages a sweet spot, offering competitive rates without the upfront cost of insurance.
Each mortgage type has its own pros and cons, and your choice will depend on factors like your financial situation, the amount of your down payment, and your long-term homeownership goals.
Don’t forget to book a meeting with me to go over your options on a personalize
