Loan Types

Insurable versus Uninsured Mortgages

Insurable versus Uninsured Mortgages
Written by
  • nesto
| Feb 17, 2022
Reviewed, May 8, 2024

Table of contents

    Understanding the various aspects of mortgages can be quite a hassle, especially with all the technical terms involved. 

    This is no different for mortgage insurance, especially given the changes made by the Canada Mortgage and Housing Corp (CMHC) in recent times. 

    On the basis of mortgage default insurance, mortgages fall under 3 categories: 

    • Insured mortgage
    • Insurable mortgage 
    • Uninsured mortgage

    This article provides a brief yet comprehensive overview of the essential elements within these categories, helping you determine the insurability of your mortgage.

    Key Takeaways

    • A down payment of less than 20% automatically attracts default mortgage insurance. Homes below $500,000 require a minimum of 5% down payment
    • A minimum credit score of 600 is required to be eligible for an insured mortgage
    • Properties in excess of $1 million purchase price are ineligible for mortgage insurance
    • 25 years is the maximum amortization period for mortgages insured

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    What is an Insured Mortgage?

    An insured mortgage requires mandatory default insurance. A down payment of less than 20% basically attracts default mortgage insurance. 

    The insurance serves to protect the lender in the event that you default on mortgage payments or foreclosure occurs

    The following are the most vital requirements that apply to an insured mortgage:

    • Payment of insurance premiums 
    • This applies to mortgages with a loan-to-value (LTV) of 80.01 to 95%
    • Undergoes stress test at the Bank of Canada’s base rate with 25 years as maximum amortization 
    • Unavailable for home purchases of $1 million and over, non-owner-occupied properties, or refinances 
    • Credit score requirement of at least 600, verifiable income, and fair debt ratios

    Insured mortgages offer the best rate since they are low risk on the lender’s part. The borrower is the one who plays the premium.

    What is an Insurable Mortgage?

    An insurable mortgage is a mortgage that can be insured but whose insurance isn’t mandatory, as in the case of insured mortgages. In other words, the borrower can decide not to insure the mortgage without any penalty. 

    An insurable mortgage could come with a slightly higher rate compared to an insured mortgage. The main difference between the two is that, in this instance, the lender pays the premium for securitization.

    The following are the most vital requirements that apply to an insurable mortgage:

    • Minimum down payment of 20% or more (loan-to-value of 80% and less)
    • Pass mortgage stress test 
    • Purchase price in the region of less than $1 million
    • A credit score of over 600 and a reasonable debt service ratio limits 
    • 25 years as the maximum amortization

    What is an Uninsured Mortgage?

    An uninsured mortgage is simply not insured whether the lender or borrower wants it. This is the major difference between an insurable and Uninsured mortgage. 

    An uninsured mortgage in Canada implies that no additional premium is paid by either the borrower or lender. 

    The following are the most common scenarios where a mortgage can be Uninsured: 

    • Purchasing non-owner-occupied single-unit rental properties
    • Purchases worth $1million or more
    • Amortizations in excess of 25 years 
    • Refinances (usually when you opt for a loan with higher risk)

    Uninsured mortgage rates are typically slightly higher than insurable mortgage rates. 

    ​​Insurable vs Uninsured Mortgages

    Comparing insurable vs Uninsured mortgages, the table below details the highlights: 

    Insurable Mortgage  Uninsurable Mortgage 
    Mortgage stress test can be avoided by opting for an alternative or private lender Mortgage stress test can be avoided by opting for a alternative or private lender
    Requires passing the mortgage stress test $1 million or more purchase price 
    25 years or less Amortization period  Excess of 25 years amortization period 
    Brand new property purchase or mortgage renewal  Refinance resulting in higher mortgage amount, circumstances with the borrower or the property may also result in a mortgage being uninsurable

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    Mortgage-Backed Securities and CMHC Guarantee Fees

    Beyond protection from losses, lenders also tread the path of insuring mortgages for another reason; securitization. Securitization refers to a process whereby assets, in this case mortgages, are pooled together by lenders and then sold off to investors. 

    These mortgages, otherwise known as Mortgage-Backed Securities (MBS), if issued by National Housing Act (NHA) approved lenders, are eligible to be insured by the CMHC. 

    Small lenders are able to sell these mortgages off as an MBS and free up the capital to fund other mortgages further. This is especially popular amongst B-lenders such as First National, Home Trust, and CMLS. 

    The base requirement for any mortgage to be included in a MBS pool is that they must be insured. In other words, only insured mortgages and insurable mortgages which are insured are eligible. Here, mortgage default insurance obtained from a private mortgage insurer in Canada or even the CMHC is allowed. The lender would have to pay CMHC fees because of the MBS guarantee, as well as pay mortgage default insurance. 

    Investors are more inclined to consider a MBS if it is guaranteed by the CMHC. This is because CMHC would secure both interest and principal of MBS for investors provided the mortgage issuers pay the CMHC guarantee fees. 

    The fees are generally determined by two main factors:

    • Size of the MBS
    • Term of the MBS

     A higher fee would be charged for a longer MBS term. Similarly, a lower insurer fee would be paid for MBS, which would include social housing loans and multi-family loans. It’s worth noting that an insurer application fee of 2 basic points or 0.02% of the total MBS sum applies. In addition, any MBS issuer with more than $9 billion in yearly MBS guarantees is required to pay more in insurer fees.

    Final Thoughts

    Reviewing the requirements highlighted in this article will help you easily tell whether your mortgage is insurable or insured. Similarly, you are now in the know about a major reason why lenders insure mortgages. Contact nesto’s mortgage experts and find out how you can save money with an insured or insurable mortgage.

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    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

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