The mortgage rule changes over the last 2 years, which were intended to limit the climb of consumer debt, have resulted in a segmented mortgage market. When we’re reviewing mortgage possibilities for clients the segment that offers the lowest interest rates is called “insured or insurable.” This week we will review and highlight what’s required to qualify for an insured or insurable mortgage which can save thousands of dollars in interest over the life of a mortgage OAC.
Getting an insured mortgage in Vancouver
Let’s start with insured. Insured means the mortgage is insured against default by one of Canada’s three default insurance providers; CMHC, Genworth or Canada Guaranty. Most clients mistakenly believe an insured mortgage only occurs when a borrower puts less than 20% down. While default insurance is mandatory with less than 20% down, when buying a home for less than $1.0M a low loan-to-value mortgage can be insured if the following conditions apply:
Purchase Price is less than $1.0M
Amortization is 25 years or less
The borrower has a minimum credit score of 620 Verified Income supports mortgage payments using the Bank of Canada Benchmark Rate
Based on these criteria a potential borrower needing a $400,000 mortgage could secure rates at a significantly lower cost than “uninsured/conventional” lenders offer. Let’s drill down and look at an example:
Purchase Price $700,000
$300,000 Down payment
$400,000 Mortgage required
Borrower meets insured income and credit requirements
Best Insured 5 year fixed rate is 3.24% OAC Best Uninsured 5 year fixed rate is 3.69% OAC
The insured 3.24% 5 year, 25-year amortization, payments with $2400 insurance premium added to the $400,000 mortgage are $1954.24/mo. The outstanding balance at the end of the term is $345,521.01.
The uninsured 3.69% 5 year, 25-year amortization, payments are $2037.40/mo. The outstanding balance at the end of the term is $346,311.39.
What’s the difference between insured and uninsured mortgage payments?
The difference in balance at the end of the term is $790.38. Let’s add the savings from lower monthly payments over 60 months. 60 months times the $83.16 difference equals $4,989.60. When we add the difference to the $790.38 lower balance, total savings over the initial 5-year term are $5,779.98!
Insured Mortgages are reserved for purchases and transfers of existing insured mortgages that mature. We suggest that its vital to apply critical thinking to a purchase below $1.0M and a renewal of any previously insured mortgage. Doing so could save you thousands depending on your specific circumstances! We suggest you contact a mortgage professional to review your specifics to see if you qualify.
Example of getting an insurable mortgage
Always save the best for last, right? In the previous example, we looked at how much could be saved by insuring a mortgage. This example shows the difference that an insurable mortgage can make.
The term insurable means certain lenders will consider offering insured mortgage rates for borrowers who meet the previously explained insured criteria. These lenders may cover the cost of the insurance premium on financing up to 65% of a home’s value. This means the savings are even greater as the lender pays for the default insurance rather than the borrower.
Revisiting the above example:
Insurable 3.24% 5 year, 25 year amortization, payments are $1942.58/mo
Outstanding balance at the end of the term $343,460.54
Uninsured 3.69% 5 year, 25 year amortization, payments are $2037.40/mo
Outstanding balance at the end of the term $346,311.39
The difference in balance is $2,850.85. The difference in monthly payments over 60 months saves another $5,689.20. Total savings on payments and interest over the term are $8,540.05.
If you or someone you know is planning to buy for less than $1.0M or if they have a mortgage due for renewal, then the best move is to explore options. You or someone you know may fit them into the insured or insurable segment.
Interested in insurable or insured mortgages? Contact Team RRP