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Getting the best mortgage rate in Canada now depends on the type of mortgage.  With the recent regulatory changes in the Canadian mortgage market, there are now 3 types of mortgages.

Insured                                  Insurable                              Uninsurable

The absolute best rates are for mortgages that are insured by one of the 3 Canadian mortgage default insurance companies: CMHC, Genworth or Canada Guarantee.  The borrower pays for mortgage default insurance, which is usually added to the mortgage balance.  The lender benefits since they have little or no risk for their money, since the mortgage is insured against default. In addition, the lender is also now able to securitize and sell these mortgages to investors.


Insured – lowest interest rates

 

Insurable - often higher rates than insured rates

·       Same Insured Criteria as above but -

·       Home purchases with more than 20% down payment

 

Uninsurable – often higher rates than insurable rates

·       Rental properties

·       Refinances or equity-take-outs

·       Properties valued over $1 Million dollars

·       Amortizations greater than 25 years

 

Insured mortgages can be securitized and sold, which reduced lenders capital requirements.  In addition, lenders are protected from default of the borrower.

Insurable mortgages can be insured by the lender, then securitized and sold to reduce capital requirements.  Lenders generally charge a higher rate since they will either be paying for the default insurance or accepting the risk of borrower default.

For uninsurable mortgages, the lenders need to be compensated for the added risk of holding a mortgage without insurance and additional capital requirements.  With uninsurable mortgages, the borrower pays for the higher risk and capital requirements, in the form of higher interest rates.

 

Borrowers who have diligently saved 20% or more for a down-payment in some ways feel penalized in the form of a higher interest rate as the borrowers putting down 20% or less get rewarded with the best rates available (but remember they have the added expense of the default insurance).

 

There is a great article on why your neighbors kids are getting a better mortgage rate here –

https://business.financialpost.com/real-estate/mortgages/why-your-neighbours-kid-is-getting-a-better-mortgage-rate-than-you

 

Kevin Bell, CFA                                              416-769-1440

 

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