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What's the difference between an insured and conventional mortgage in Canada?

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

May 6, 2019 - Karl Yeh

Not sure which type of mortgage to get when buying your next home? What are the differences? In this episode, we discuss the different type of mortgages in Canada, specifically insured vs conventional mortgage. We explore the benefits of each and the differing payment plans. 

  
  

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Transcription:

Hi everyone, I'm Karl and welcome to another Homebuyer's School video. A channel where to get the latest strategies, tactics, and tips from home buying experts. And remember, this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below, hit the little notification bell so you don't miss anything.

So today [00:00:30] I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal,. And the question we're going to answer today is,

What are the different types of mortgages in Canada?

Mujtaba Syed:                  

That's a good question, Karl.

Insured and conventional mortgages 

So the type of mortgages that we have in Canada are insured, there are two different types, insured and conventional.

 

Insured mortgages

So, what insured means is that it's actually default insured.

So you've probably heard of CMHC, GenworthCanada Guaranty. These are the default insurance providers here in Canada. The providers-

Karl Yeh:                              So, let's just stop there. What is CMHC? What does that mean?

Mujtaba Syed:                  

Sure, absolutely. So, [00:01:00] CMHC is a crown corporation. It means the Canadian Mortgage and Housing Corporation.

And they are part of the government, but kind of a little separate, but there are a crown corporation.

They provide default insurance just like Genworth does and Canada Guarantee.

So default insurance, what it is, it kind of protects the banks from default. So, prior to CMHC being around, the banks were not really giving mortgages that easily unless you had 20% down[00:01:30].

So the government kind of setup CMHC  to be like, let's help more people get into homes a lot sooner. So now you can get into a home with as little as 5% down, as long as you have default insurance.

So the way it works is, God forbid, you fall into a mishap, something's happened and you can't pay that mortgage.

The mortgage or the home goes into foreclosure. The banks are covered through default insurance.

So, that is what insurance is.

Benefits of an insured mortgage

The pros and cons to have insurance is one, it's an easier approval process.

The banks feel a lot more comfortable. Since they're a lot more comfortable [00:02:00] the banks will actually give you a better rate, because they feel like they have less risk associated with that.

So the funny thing is, the less you put down, if you have 20% compared to an insured mortgage at 5%, you actually get a better rate, but you do still have to pay for the insurance.

So, sit down with your lender, sit down with your spouse to find out what the benefit is.

Is it benefit to go with the insured to get a lower rate? Or is it better to put the 20% down if you have it and save on the default insurance?

That's a conversation to have with your lender. [00:02:30]

 

Conventional Mortgage

The second type of mortgage that we have is considered conventional.

So which is just the opposite, where you're putting more than 20% down, you have 20% equity in your home, and you don't need any default insurance.

It is just a mortgage between you and your lender.

Rates tend to be slightly a little bit higher, because of the fact that it's not insured.

So what banks have to do now is they have to price it accordingly because they might have to go and get insurance privately through a third party, whatever it might be.

So rates usually are higher. [00:03:00] I get that question a lot from my clients asking me, I'm putting more down, should I not be getting a better rate?

Traditionally that is the understanding, but the rules changed about a year ago, a year and a half ago called to B20 Mortgage Rules where it was kind of put into place where banks would now start having to insure their own mortgages.

So because of that cost has actually gone up. So, that was the conventional mortgages.

Benefits of conventional mortgage

But one of the benefits of conventional mortgage is you [00:03:30] don't have to pay for default insurance.                

That could be a potential savings of couple of thousands of dollars.

And the other potential benefit is, or is a benefit, is you can take your amortization on a conventional mortgage up to 30 years.

So if you have a 20% down payment, and you're really interested in having a lower payment every month, you can only do that with a conventional.

You can take it to 30 years, while with an insured mortgage your amortization is maximum at 25 years, and unfortunately you can't go more than that [00:04:00].

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Karl Yeh:                              

Are the payment plans different from a conventional to an insured mortgage?

Mujtaba Syed:                  

So, the way that repayment works is exactly the same. They're both mortgages.

It's just that now the rate might be differ, and your amortization might be differ, and it might not be insured. But the repayments are going to work the same way.

You can have weekly, biweekly, monthly, semi-monthly payments. And it gets paid down the same amount.

Do insured mortgages have higher payments?

Karl Yeh:                             

[00:04:30] Cool. So now with an insured mortgage, you will technically have higher payments because you have to pay for the insurance on top of your monthly mortgage payments. Right?

Mujtaba Syed:                  

Technically, traditionally, yes. B

ut the amount is over the life of the loan, which at 25 years is very negligible. So, it's barely noticeable. Right?

So for example, if we're buying a house and the insurance premiums only $11,000, that's 11,000 over 25 years, that could be a couple of dollars a month. Right? So you won't really notice it.

So, [00:05:00] it really just depends on the size of your mortgage, what the insurance premium is, and then, yes. So it would definitely have to be repayable for sure.

The payments would technically be higher than a conventional, but not enough for you to lose sleep over or notice, to be honest.

Mujtaba Syed:                  

I think we've kind of gone over a lot of information. If you have any questions about that, please reach out to us.

There was a lot of material we did go over recently. So, [00:05:30] just let us know what your questions are, and we'll be more than happy to get back to you guys.

Question of the day:

Karl Yeh:                             

Perfect. And the question of the day I have for you is:

What type of mortgage have you used in the past, insured or conventional? And what was your experience?

Let us know in the description below. And remember, if you enjoyed this video and found it helpful, make sure to like, share, and comment, as well as subscribe. Thank you and we'll catch you next time.

    

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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