It would be hard not know that there have been some pretty significant government rule changes over the last 17 months in Canada. Mortgages have become harder to qualify for by adding a stress test among other changes made. Some of the changes have significantly changed pricing of mortgages and we now deal with three distinct terms when discussing options with home buyers.
We have always known that a mortgage could either be High Ratio or Conventional. If you put less than 20% down on the purchase you had to have default insurance through CMHC, Genworth or Canada Guaranty. This makes your mortgage High Ratio. If you had the ability to put 20% down the mortgage would be Conventional with no "client paid" insurance.
Before the big changes if someone asked what their 5 year rate was we could give it right away and usually had a rate for High Ratio and one for Conventional. The rates would be quite close together but in many cases we were able to get a better rate for High Ratio mortgages. Now it is not that easy. We need to know the details of the deal and what exactly the mortgage details will be. There are lenders that have as many as 16 different 5 year rates to offer. It has become so complicated that people in our industry have created tools for us to use so that we can figure it out quicker. If it is this confusing for people that do mortgages for a living, we can't imagine what it sounds like when we explain it to our clients.
There are three terms that you need to know now when it comes to rate. These explanations will hopefully help you understand why your mortgage is priced where it is.
1. High Ratio - High Ratio mortgages have been around for a long time now. A high ratio mortgage is when you put less than 20% down on your purchase. The lower down payment forces you to insure your mortgage through one of CMHC, Genworth or Canada Guaranty. You pay an insurance premium that protects the lender from default since the insurer will cover losses if you decide to stop paying. Since you pay the insurance and the risk to the lender is lower, these mortgages are priced the lowest right now. Yes someone that puts 5% down will get a better rate than someone that puts 20% down.
2. Conventional Insurable - Conventional mortgages are the term we use when you put 20% down and you do not have to insure your mortgage through one of the insurers. What most people do not realize is that many conventional mortgages are still insured, just by the lender. They have to be insurable in order to do this. In other words the mortgage must meet insurer guidelines (you will learn more about this in the next type of mortgage). Lenders participate in something called bulk insurance. This is where they pay an insurance premium themselves to protect the mortgage from default. The same insurers are used but the cost is taken on by the lender. Given the added cost to fund these mortgages, there is a premium added to the rate to help make up the difference. These mortgages are more expensive than high ratio mortgages. You will even see a difference in rate depending on size of down payment. Someone that puts 20% down will have a higher rate than someone that puts 35% down. Once again it comes down to cost.
3. Conventional Uninsurable - As you may be able to guess, these are mortgages with a minimum of 20% down but they do not fit the insurer guidelines. The mortgages in this category include amortizations higher than 25 years, refinances, purchases over a million and rental properties. None of these are able to be insured by the lender so they take on the full risk along with having to find more expensive sources to fund them. These two factors make this group of mortgages the most expensive.
How did this happen? When the government made their first big announcement back in October of 2016 the main focus was on qualifying rates. Not surprising as this made housing affordability a lot harder. At the same time they made other changes that caused what you have just read about. They increased the premiums for high ratio mortgages and the bulk insurance which drove up costs for lenders. The other big change was making that last group of uninsurable mortgages so that lenders had to change how they would deal with them. Lenders figured it out by providing higher rates for those specific mortgage loans.
The mortgage world is very complex and challenging. You should not feel like you need to know everything as it is an ever changing world. One thing we promise you is that you need to deal with a mortgage professional. We always like to say if the person you are dealing with does not have "mortgage" in their title you need to reconsider your decision. Things change fast and you deserve someone that is 100% in the game when you are dealing with one of the largest financial decisions of your life.
Your Mortgage Guru
This article is in the category: General.