When it comes to mortgages in Canada, there are three main categories: insured, insurable, and uninsurable. The type of mortgage you choose can have a significant impact on your home purchase and financial future. It’s essential to understand the differences between these categories and the eligibility criteria associated with each. Let’s take a closer look at what sets them apart.
Key Takeaways:
- Insured mortgages have mortgage insurance, while uninsured mortgages do not.
- Insurable mortgages can be either insured or uninsured, depending on the lender’s choice.
- Understanding the differences between these types of mortgages is crucial for making informed decisions on your home purchase in Canada.
- Insurable mortgages require meeting specific eligibility criteria, such as down payment, purchase price, and meeting CMHC requirements.
- Uninsurable mortgages have characteristics that make them ineligible for insurance, such as a purchase price of $1.5 million or more
- Amortization of insured mortgages can extend to 30 years for all first-time homebuyers and for those buying new constructions
- All insured mortgage holders can switch lenders at renewal without undergoing another mortgage stress test.
What are Insurable and Uninsurable Mortgages?
When it comes to mortgages, there are different categories that borrowers should be aware of: insured, insurable, and uninsurable mortgages. Each type has its own characteristics and eligibility requirements, which can impact the borrower’s options and costs. Let’s explore the differences between insurable and uninsurable mortgages.
Insurable Mortgages
An insurable mortgage is a mortgage that can be insured, although it may not currently have insurance. These mortgages meet specific requirements set by the Canada Mortgage and Housing Corporation (CMHC), allowing borrowers to obtain mortgage insurance if desired.
In order to be considered insurable, a mortgage needs to meet certain criteria. This includes having a down payment of 20% or more, a purchase price below $1.5 million, and meeting CMHC eligibility requirements such as credit score and debt service ratio limits. The property must be owner-occupied or used by a family member. Generally, insurable mortgages are applicable to purchase transactions, switches/transfers, not refinances. By meeting these requirements, borrowers have the option to insure their mortgage to protect against default.
Uninsurable Mortgages
On the other hand, an uninsurable mortgage is one that cannot be insured, regardless of the borrower’s or lender’s choice. These mortgages have characteristics that make them ineligible for mortgage insurance. Some of the common reasons for uninsurability include a purchase price of $1.5 million or more, an amortization period longer than 25 years for non-first time buyers of resale homes, or properties located outside of Canada.
Uninsurable mortgages may have stricter requirements and potentially higher interest rates compared to insured or insurable mortgages. Lenders typically have limited options to mitigate risks associated with these mortgages, leading to increased costs for borrowers.
Lender Options and Insuring a Mortgage
When it comes to insuring a mortgage, borrowers should be aware that it is the lender’s decision whether to obtain insurance for an insurable mortgage. Lenders weigh the risks associated with the mortgage and make their own determination about the need for insurance.
Insured mortgages are generally seen as lower risk for lenders, and therefore, they may offer better terms and conditions such as lower interest rates. Insured mortgages require the borrower to pay insurance premiums, which can be added to the mortgage amount or paid upfront.
Insurable mortgages, on the other hand, provide lenders with some flexibility. They can choose to insure the mortgage or not, depending on their assessment of the borrower’s risk profile. These mortgages do not require the borrower to pay insurance premiums, which can lead to cost savings over the life of the mortgage.
CMHC Eligibility Requirements
CMHC, as the main provider of mortgage loan insurance in Canada, sets eligibility requirements for both borrowers and mortgages. Meeting these requirements is crucial for borrowers seeking mortgage insurance for their insurable mortgages.
Some of the CMHC eligibility requirements include:
- Minimum credit score: Borrowers typically need a credit score of at least 600 to be eligible for mortgage insurance.
- Debt service ratio limits: Borrowers must meet certain debt service ratio limits to qualify for mortgage insurance. These ratios compare the borrower’s income to their monthly debt obligations.
By meeting these requirements, borrowers increase their chances of obtaining mortgage insurance for their insurable mortgages.
Eligibility and Requirements for Insurable Mortgages
Insurable mortgages provide an opportunity for borrowers to obtain mortgage insurance, offering added security and financial protection. In order to qualify for insurance, certain eligibility criteria and requirements must be met. These include:
- Down payment: A minimum down payment of 20% or more is required for insurable mortgages. This ensures that borrowers have a significant equity stake in their homes, reducing the risk for lenders.
- Purchase price: The purchase price of the property must be below $1.5 million to be eligible for mortgage insurance. This limit helps to ensure that insurance is accessible to a wide range of homebuyers.
- CMHC eligibility requirements: The Canada Mortgage and Housing Corporation (CMHC) has specific eligibility criteria that borrowers must meet, including a credit score above 600 and debt service ratio limits. These criteria demonstrate the borrower’s ability to manage their finances responsibly.
- Mortgage stress test: Borrowers must pass the mortgage stress test, which assesses their ability to make mortgage payments at a higher interest rate. This test safeguards against any potential financial strain or hardship in the future.
- Maximum amortization: Insurable mortgages have a maximum amortization period of 25 years for non-first time buyers purchasing resale homes or up to 30 years for first-time buyers or those purchasing new construction. This ensures that the mortgage is repaid within a reasonable timeframe and reduces the risk for both the borrower and the lender.
Meeting these requirements for insurable mortgages provides borrowers with the opportunity to access mortgage insurance, which offers added financial protection and peace of mind.
| Eligibility and Requirements for Insurable Mortgages | |
|---|---|
| Down payment | A minimum of 20% or more |
| Purchase price | Below $1.5 million |
| CMHC eligibility requirements | Credit score above 600, debt service ratio limits |
| Mortgage stress test | Passing the stress test |
| Maximum amortization | 25 years for non-first time resale buyers; 30 years for first-time and new construction buyers |
Also Read:
- Required Mortgage Default Insurance
- Title Insurance: Home Protection
- What is Critical Illness Insurance?
- What is Disability Insurance?
Characteristics of Uninsurable Mortgages
Uninsurable mortgages are characterized by specific features that make them ineligible for mortgage insurance. Understanding these characteristics is crucial for borrowers considering this type of mortgage. The following factors contribute to the uninsurability of a mortgage:
- Purchase price: Uninsurable mortgages typically involve a purchase price of $1.5 million or more, exceeding the threshold set by mortgage insurance providers.
- Property location: Mortgages on properties located outside of Canada are deemed uninsurable, as they fall outside the scope of mortgage insurance.
- Amortization period: Uninsurable mortgages often have an amortization period exceeding 30 years for first-time home buyers or buyers of new construction or 25 years for non-first-time buyers to purchase resale. This longer repayment schedule poses a higher risk for lenders.
- Occupancy type: Non-owner-occupied rental properties are considered uninsurable, as they involve a higher level of risk for mortgage insurance providers.
- CMHC requirements: Failing to meet the eligibility requirements set by the Canada Mortgage and Housing Corporation (CMHC), such as a poor credit score or high debt service ratios, can result in an uninsurable mortgage.
- Mortgage purpose: Certain mortgage purposes, such as mortgage renewals, may render the mortgage uninsurable due to the absence of specific insurability criteria. See below:
The insurability status of a mortgage at the time of renewal can indeed be influenced by the specific criteria set by mortgage insurance providers like the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, or Canada Guaranty. However, the relationship between mortgage renewals and insurability isn’t straightforward and depends on several factors:
Key Points on Mortgage Renewal and Insurability
Existing Insurance Status: If a mortgage was originally insured, and you are simply renewing your mortgage with the same lender under similar terms, the insurance coverage generally continues until the mortgage is fully paid off, even if you renew. This applies as long as there are no significant changes to the mortgage terms that would violate the original insurance agreement.
Changing Lenders or Terms: If you decide to switch lenders at renewal or significantly change the terms of your mortgage (like increasing the amortization period beyond what was originally insured or taking out additional equity), the new mortgage may need to be re-assessed for insurability. In such cases, the new mortgage terms might not meet the criteria for insurance.
Amortization Changes: Extending the amortization period during a renewal to more than 30 years can render a mortgage uninsurable, as default mortgage insurance providers do not cover mortgages with amortization periods exceeding 30 years.
Property Value and Mortgage Amount: If the property value has increased significantly, or if additional funds are borrowed (increasing the loan amount), the mortgage might need a new assessment for insurance purposes, and it could potentially be considered uninsurable if it does not meet the criteria.
General Rule for Renewals
Mortgage renewals with the same lender and under the same terms: Typically, these do not affect the insurability status if the mortgage was initially insured. No new insurance application is necessary.
Mortgage renewals involving changes in terms, lender, or borrowing more money: These could require a re-evaluation of the mortgage for insurability, and it’s possible that the mortgage could become uninsurable depending on how the changes align with the criteria of the insurance providers.
For those renewing their mortgage, it’s advisable to consult with Allen Ehlert to understand how changes in terms or lenders might impact the insurability of their mortgage. This will help in making informed decisions about the best way to structure their mortgage at renewal. As a consequence, uninsurable mortgages tend to have higher mortgage rates and stricter approval criteria compared to insured and insurable mortgages. Lenders view these mortgages as higher risk, given the absence of mortgage insurance protection. It is important for homebuyers to carefully consider whether the benefits of an uninsurable mortgage outweigh the potential drawbacks.
Impact on Mortgage Rates and Costs
The type of mortgage you choose can have a significant impact on the rates and costs associated with your home loan. Understanding how insured, insurable, and uninsured mortgages differ in terms of rates and costs can help you make an informed decision when selecting the right mortgage for your needs.
Insured mortgages typically come with the lowest interest rates. This is because these mortgages are backed by mortgage insurance, reducing the risk for lenders. Mortgage insurance is usually provided by government-backed agencies such as the Canada Mortgage and Housing Corporation (CMHC). The presence of insurance gives lenders the confidence to offer lower rates to borrowers.
On the other hand, insurable mortgages may have slightly higher rates compared to insured mortgages. Insurable mortgages are mortgages that can be insured but may not currently have insurance. Lenders have the option to choose whether or not to insure these mortgages. The possibility of insurance coverage may factor into the interest rates offered by the lenders.
Uninsurable mortgages, being the riskiest for lenders, often come with the highest rates. These mortgages cannot be insured and do not have the added protection of mortgage insurance. Lenders take on more risk when offering uninsured mortgages, which leads to higher interest rates to compensate for that risk.
It’s important to consider both the rates and the overall costs associated with each type of mortgage when making your decision. Insured mortgages may require additional insurance premiums, which can add to the overall cost of the mortgage. On the other hand, insurable mortgages with larger down payments and favourable terms may be able to achieve similar rates to insured mortgages without the added insurance premiums.
Comparing mortgage rates and costs between different types of mortgages is essential for choosing the option that aligns with your financial goals and situation. By understanding the impact of mortgage types on rates and costs, you can make a well-informed decision that best suits your needs.
| Insurable | Uninsurable |
| Purchase price less than $1.5 million | Purchase price of $1.5 million or more |
| Property is located in Canada | Property is outside Canada |
| Owner occupied | Single-unit non-owner occupied rental property |
| New Purchase or mortgage renewal | Increasing the mortgage amount when refinancing |
| Amortization: 25 or 30 years or less | Amortization: longer than 25 or 30 years |
| Meets CMHC requirements, including: A credit score above 600 A gross debt service ratio of 39% or less A total debt service ratio of 44% or less | Does not meet CMHC requirements: credit score below 600 A gross debt service ratio greater than 39% A total debt service ratio greater than 44% |
| Can it be insured? | Meets CMHC Requirements? | You pay CMHC Premiums | Mortgage Rates | |
| Insured | Yes | Yes | Yes | Low |
| Insurable | Yes | Yes | No | Medium |
| Uninsurable | No | No | No | Medium -High |
Conclusion
Understanding the differences between insured, insurable, and uninsurable mortgages is essential for navigating the Canadian housing market. Insured mortgages provide the lowest rates, making them an attractive option for many borrowers. However, it’s important to note that insured mortgages come with insurance premiums, which can increase the overall cost of the mortgage.
On the other hand, insurable mortgages have slightly higher rates but do not require insurance premiums if certain requirements are met. This can be beneficial for borrowers who meet the eligibility criteria set by mortgage insurance providers such as CMHC. It’s important to consider your financial situation and goals to determine if an insurable mortgage is the right choice for you.
Uninsurable mortgages, while often carrying higher rates and stricter approval criteria, may still be the best option for certain borrowers. These mortgages are not eligible for mortgage insurance and are typically chosen for properties with a purchase price of $1.5 million or more or for borrowers with non-traditional sources of income. If you’re considering an uninsurable mortgage, it’s important to understand the potential impact on your mortgage rates and overall costs.
Ultimately, choosing the right type of mortgage depends on your individual circumstances. Whether you opt for an insured, insurable, or uninsurable mortgage, it’s crucial to carefully evaluate your financial needs, long-term goals, and risk tolerance. Consulting with a mortgage professional can help you make an informed decision and secure a mortgage that suits your specific needs.
FAQ
What is an insured mortgage?
An insured mortgage is a mortgage that has mortgage insurance, which provides protection for the lender in case the borrower defaults on the loan.
What is an insurable mortgage?
An insurable mortgage is a mortgage that can be insured but may not currently have insurance. These mortgages meet certain requirements set by CMHC and lenders have the option to insure them.
What is an uninsurable mortgage?
An uninsurable mortgage is a mortgage that cannot be insured, regardless of the borrower’s or lender’s choice. This may be due to certain characteristics that make the mortgage ineligible for insurance, such as a purchase price of $1.5 million or more or an amortization period longer than 25 years for a non-first time buyer of a resale home or 30 years for all first time home buyers or purchasers of new construction.
What are the requirements for an insurable mortgage?
To qualify for insurance, an insurable mortgage typically requires a down payment of 20% or more, a purchase price below $1.5 million, meeting CMHC eligibility criteria, passing the mortgage stress test, and a maximum amortization period of 25 years for a non-first time buyer of a resale home or 30 years for all first time home buyers or purchasers of new construction..
What are the characteristics of an uninsurable mortgage?
Uninsurable mortgages may have characteristics that make them ineligible for insurance, such as a purchase price of $1.5 million or more, property located outside of Canada, an amortization period longer than 25 years for a non-first-time buyer of a resale home or 30 years for all first time home buyers or purchasers of new construction, non-owner-occupied rental properties, mortgage renewals, or failing to meet CMHC requirements.
How do mortgage rates differ for insured, insurable, and uninsurable mortgages?
Insured mortgages typically have the lowest rates, while insurable mortgages have slightly higher rates due to the possible cost of insurance. Uninsurable mortgages, being the riskiest for lenders, often come with the highest rates.
