​Down Payments & Different Mortgage Options - Why Choose 1 vs Another?

 
In meeting with clients for coffee, lunch, or just chatting with them on the phone I am constantly asked about mortgages, down payment requirements, interest rates, and all other things that tie into the world or lending when it comes to buying a property. It is such a popular topic of conversation in these meetings that I thought I would purge a bit of info here in hopes that if you have stumbled upon this page it can be useful to answer some questions you may have. That said, lets dive right in.
 
When looking to make a purchase there are a couple of different options out there that you can consider to achieve the financing you desire to get into the dream home you are looking for. These options include High Ratio Mortgage, Insurable Mortgage, and finally Conventional Mortgage. They all 3 have very different requirements, as well as pros and cons, but hey let’s be honest, if you are looking to buy, you will often times take what you can get and are simply seeking any means to make it work.
 
High Ratio (Insured)
First let’s investigate why a High Ratio Mortgage might be your best option. A high ratio mortgage allows you to get the financing you are seeking if you can’t come up with the lenders desired 20% down. Which is a great option if you don’t just have $140,000 floating around to purchase a $700,000 home. Trust me you are not alone, & this is where a high ratio mortgage is a great option. Here in BC, most lenders will allow you to get this option going with as little as 5% down on the first $500,000 and then after that you need to come up with 10% on the remaining balance. (So, in this $700,000 example, you need $25k on that first 500k + 10% on the remaining $200,000($20k), meaning $45,000.) $45,000 is a lot more reasonable for a lot of people than the $140,000 mentioned above, this is where High Ratio is great!
The unfortunate side is that the bank will require you to purchase mortgage insurance, which isn’t nothing, but if it gets you into your home, you’re happy right?  So, what is mortgage insurance looking like? Well, it is a one time payment due at the time of lending that is 4% of the loan value if you only put down 5% and on a sliding scale from there. You can look at the scale as roughly:

• 5% down = 4% mortgage insurance rate
• 10% down = 3.1% mortgage insurance rate
• 15% down = 2.8% mortgage insurance rate
• 20% down = 2.4% mortgage insurance rate – but if you are putting down the 20% the later discussed lending options are most likely a better option for you.

Let’s put that number into context using our $700,000 property example.  If you, do the minimum allowable payment depicted above(45k), you are looking at mortgage insurance running you a one-time payment of roughly $26,180. I know, OUCH!!!! No one likes an additional $26k out, but let’s look at it this way… Even with this payment you are getting into your home with 45,000+26,180= $71,180, still a lot less than $140,000 right?
This home loan option is usually fixed to 25 year amortization, and you are working with the traditional 39/44 debt ratio that nearly all lenders require. (I’ll save that for another post, but basic concept is that your expenses can’t go beyond 44% of your income to qualify for the loan). These loans also only allow you to purchase something under $1 million, and must be owner occupied(not rental/investment properties) and in Canada.
Aside from not needing the 20% down, you may also see a benefit of a lower interest rate than uninsured/conventional as the bank is guaranteed to make their money because of the insurance, therefore there is less risk for them, so they often offer a lower rate.
 
Insurable Mortgage
Next let’s jump into an Insured Mortgage. This is quite similar to the High Ratio, in the sense that you still need to meet the 39/44 Gross debt/Total debt ratio, must be under a million dollars, owner occupied, and are bound to 25-year amortization term, & must be in Canada, but there is a couple major differences. The first difference is that you DO need to put down 20% of the purchase price of the house. Which is the $140,000 on a $700,000 house example. However, the great part is that the bank will be the ones to pay the one-time mortgage insurance payment for you. Meaning you don’t need to pay the $26k that you did in the High Ratio option, because they will.
With this style of lending you may also benefit from a lower rate than uninsured/conventional because it has insurance attached to it for them, therefore less risk associated. However, with them paying the insurance on that the rate may be slightly higher than High Ratio. Think of this as the Mama Bear in the options.
 
Conventional Mortgage (Uninsured)
This is the final option in the mortgage arena, and just like the others it comes along with its pros & cons. Going this route you don’t need to have insurance, so it does save the 10,000’s of 1,000’s of $’s the other 2 had. However, you need to have more than 10’s of 1,000’s because for this mortgage you must have the 20% down payment for the value of the loan, as the bank does not exceed 80% of the value of the asset. This mortgage is automatically the one that is used for properties over $1,000,000, and due to the lack of insurance on it, it will more than likely have the highest interest rate, because the bank is taking on the most risk. They charge premiums anytime they are sticking their neck out.
The benefits of a conventional mortgage though is that you can extend the amortization beyond 25years, say 30 for example, resulting in lower monthly payments. Additionally, this does not need to be owner occupied, so this lending works for investment/rental purposes. Lastly, there is usually a bit more leniency on your credit score, meaning it doesn’t necessarily need to be as high, and a bit more flexibility on the 39/44 ratio as well, allowing that to often be adjusted upward.
 
I hope this helped to bring a little clarity to what the differences are between insured and uninsured, high ratio vs. conventional, and all the other mortgage terms you hear floating around. I do want to qualify this as I am licensed realtor, but not a financial planner, or mortgage broker, so this is just some basic knowledge to share.
Please feel free to ask any questions in the comments below, and I will gladly address them. Or don’t hesitate to pick up the phone and give me a call, I am always happy to chat -778-927-4306.
Additionally, I have a number of mortgage experts I have had the pleasure of working with and would be happy to point you in their directions if you require further assistance, are looking to get pre-qualified, or have any other mortgage related needs.