A rate is not a rate. Wait, what? For the past decade, the regulatory changes in Canada have spawned different types or classes of rates. The three classes are INSURED, INSURABLE & UNINSURED.
INSURED: This is almost always the best rate you can get for your mortgage. The borrower will pay for mortgage default insurance from either CMHC, Sagen, or Canada Guaranty. The cost of this is called the premium and it can range from .60% of the mortgage amount all the way up to 6.6% of the mortgage amount. The insurance premium is added to the mortgage amount and amortized and calculated in the mortgage payments. The amortization of the mortgage is limited to 25 years. Mortgage default insurance is required if a borrower is making a down payment of less than 20%. It is optional if a borrower is making a down payment of 20% or more. Why would anyone opt to pay this insurance? It will let them have a better rate now and usually a lower payment for the first term. Upon renewal the mortgage will be easier to transfer or change lenders and the borrower will always get the lowest rate the math will favor the insured mortgage rate in terms 2 & 3 and come out better in the longer term. If clients are putting down 35% or more, the insurance is quite inexpensive in comparison to other down payment levels and the mortgage application can usually be done much faster and include the cost of the appraisal.
INSURABLE: An insurable rate is for mortgages that have a down payment of 20% or more and are limited to an amortization of a maximum of 25 years. The insurable rate is slightly higher than the insured rate and presents a slightly higher risk and cost to the lender. They will package up many mortgages with this time rate and pay for the mortgage default insurance in bulk. Basically, bundled mortgage default insurance for lenders. The mortgages can then be sold as high-quality government-guaranteed investments through the MBS – Mortgage-Backed Securities on the secondary market. MBS offers safe investments with competitive yields and is RSP/RRIF eligible.
UNINSURED: An uninsured rate does not have any mortgage default insurance attached and the lender is lending their own cash using the property and the personal covenant/guarantee of the borrowers as security on the mortgage. The borrower must put down 20% or more and the lender is assuming more risk. The uninsured rate is almost always the highest of the three classes. The borrower however can extend the amortization to 30 years and lower payments. Some lenders in the alternative space will allow 35-year and even 40-year amortization in exchange for an application fee and a higher interest rate.
Inside of these three classes (Insured, Insurable, and Uninsured), there are 3 types of rates; Fixed, Variable, and adjustable.
FIXED: Offers terms of 1-10 years and the borrower will pay a fixed payment at a fixed rate for the entire length of the term.
VARIABLE: Variable rates will fluctuate when the Bank Of Canada either raises or lowers the PRIME lending rate. The payments for this time of mortgage will remain static. As the prime rate increases or decreases the lender will adjust the principal and interest amounts of the payment, but keep the payment the same. The lender will also include in the mortgage contract a trigger rate which is a rate where the payments will increase if interest rates continue to increase as they did in late 2022 and 2023.
ADJUSTABLE: Adjustable rates are also variable and will fluctuate when the Bank Of Canada either increases or decreases the PRIME lending rate. However, with this type of rate, the lender will adjust the payments to match the current Prime Lending Rate.
If you are looking to be approved for a mortgage whether you are looking for a pre-approval, buying a new home, refinancing or renewing your existing mortgage, or looking for ways to access your home’s equity, contact us today!