When applying for a mortgage in Canada, it’s important to understand the different types of mortgages available: insured, insurable, and conventional. Each type comes with its own qualifications, benefits, and considerations, which can impact your interest rates, down payment requirements, and long-term financial planning. Let’s dive into the key differences between these mortgage types and how they apply to homebuyers in areas like Hamilton, Niagara, and beyond.
1. Insured Mortgages
An insured mortgage is a type of mortgage that requires mortgage default insurance, typically because the down payment is less than 20% of the home’s purchase price. In Canada, mortgage insurance protects the lender in case the borrower defaults on their loan. Insured mortgages are common for first-time homebuyers who may not have enough savings for a large down payment.
Key Features:
- Minimum Down Payment: As low as 5% of the purchase price.
- Insurance Providers: The insurance is provided by government-backed institutions such as the Canada Mortgage and Housing Corporation (CMHC), Genworth (now Sagen), or Canada Guaranty.
- Benefits: Insured mortgages often come with lower interest rates because the insurance reduces the lender’s risk. However, you will pay a premium for this insurance, which is either added to your mortgage or paid upfront.
Who Should Consider an Insured Mortgage?
If you’re a first-time homebuyer in Hamilton, Windsor, or Toronto and don’t have a 20% down payment saved, an insured mortgage may be your best option. This allows you to enter the housing market sooner, despite a lower down payment.
2. Insurable Mortgages
An insurable mortgage is one that meets the criteria to be insured, but the mortgage itself may not actually require insurance because the down payment is 20% or more. Lenders may still choose to insure these mortgages on their own for various reasons, including reducing their own financial risk. Since the mortgage qualifies as insurable, the borrower can often benefit from lower interest rates, even if no insurance premium is paid by the borrower.
Key Features:
- Down Payment: At least 20%.
- No Insurance Premium for Borrowers: Although the mortgage is insurable, the borrower does not pay an insurance premium if the lender opts for the insurance.
- Benefits: Insurable mortgages typically qualify for lower interest rates, similar to insured mortgages, because the mortgage meets high credit and down payment standards.
Who Should Consider an Insurable Mortgage?
If you’re a buyer with a strong financial profile and a down payment of 20% or more but still want to benefit from low interest rates, this option could work well. Homebuyers in Niagara or Windsor seeking cost-effective mortgage solutions for properties under $1,000,000 often fall into this category.
3. Conventional Mortgages
A conventional mortgage is one where the down payment is at least 20% and the loan does not require any form of mortgage insurance. Because no insurance is involved, conventional mortgages are seen as riskier for lenders, which means the interest rates can sometimes be higher than those for insured or insurable mortgages.
Key Features:
- Down Payment: 20% or more.
- No Insurance Requirement: The borrower does not need to pay for mortgage insurance, reducing upfront costs.
- Interest Rates: Interest rates may be slightly higher compared to insured or insurable mortgages, especially if the lender is not insuring the loan themselves.
Who Should Consider a Conventional Mortgage?
If you have a substantial down payment and want to avoid the cost of mortgage insurance, a conventional mortgage is the ideal choice. Real estate investors in Hamilton and Toronto often use conventional mortgages when purchasing investment properties, as they typically come with higher down payments.
Which Mortgage is Right for You?
Choosing between an insured, insurable, or conventional mortgage depends on your financial situation, down payment size, and long-term goals.
- First-time homebuyers with less than 20% down will likely benefit from an insured mortgage, especially if they want to secure lower interest rates.
- Buyers with a 20% down payment and a strong financial history may benefit from an insurable mortgage, taking advantage of lower rates without the cost of mortgage insurance.
- Real estate investors and buyers with substantial down payments might opt for a conventional mortgage to avoid insurance premiums altogether.
Conclusion
Understanding the differences between insured, insurable, and conventional mortgages can help you make a more informed decision when buying property in Hamilton, Toronto, or other regions in Ontario. Whether you’re looking for your first home or an investment property, working with a knowledgeable mortgage broker can help you navigate these options and secure the best mortgage terms for your needs.
For expert advice on choosing the right mortgage, feel free to contact me, I specialize in helping first-time homebuyers, investors, and Canadians looking to invest in the U.S. real estate market.