Insurable vs. Uninsured Mortgages: What You Need to Know
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Mortgages in Canada can either be insured, insurable, or uninsured. Insured mortgages allow you to purchase a home with as little as 5% of the purchase price as a downpayment. Insurable and uninsured mortgages require a minimum 20% downpayment.
However, the similarities end there, as insurable and uninsured mortgages have different requirements for default insurance, interest rates, amortization, and property eligibility. If you plan to put 20% or more down, this post will help you compare the differences between insurable and uninsured mortgages to determine which option is right for you.
Key Takeaways
- Insurable mortgages require a minimum of 20% downpayment but can still be default-insured, potentially leading to better rates.
- Uninsured mortgages also require 20% or more downpayment but cannot be default-insured, often resulting in slightly higher interest rates.
- Uninsured mortgages are a good option for investment properties, purchases over $1 million, and longer amortizations.
What Is an Insurable Mortgage?
An insurable or low-ratio mortgage is a loan where the borrower makes a downpayment of at least 20% but still requires mortgage default insurance. Lenders may cover the premium on insurable mortgages, while other lenders may require the borrower to pay the premium.
Insurable mortgages have restrictions, including a maximum purchase price of less than $1 million, a 25-year amortization period, and the property must be owner-occupied or occupied by immediate family. Since the lender default insures the mortgage through low-ratio or portfolio insurance, borrowers can benefit from lower interest rates as the lender’s risk is reduced.
What Is an Uninsured Mortgage?
An uninsured or conventional mortgage requires a downpayment of at least 20% but does not require mortgage default insurance. This type of mortgage has no restrictions and applies to higher-value properties (priced over $1 million), second homes not used by immediate family, investment properties, and those with longer amortization periods (up to 30 years with prime lending). It also applies if the borrower meets the criteria for an insurable mortgage but opts not to purchase default insurance, allowing the equity from the downpayment to be sufficient to protect the lender.
The lender takes on more risk since uninsured mortgages are not backed by default insurance. To account for this, lenders often offer higher interest rates to uninsured borrowers than those with insurable or insured mortgages. However, the savings from not paying the premium upfront or the additional interest-carrying costs from adding default insurance to your mortgage could offset the higher interest rates on uninsured mortgages.
When Would You Need an Uninsured Mortgage?
Uninsured mortgages are often used for properties that don’t meet the requirements for insured or insurable mortgages. Common reasons you may need an uninsured mortgage include the following:
- The borrower opts not to purchase mortgage default insurance.
- If the home purchase price is over $1 million.
- If the amortization period exceeds 25 years.
- If the property will be occupied by an unrelated person or a secondary home with multiple units (not owner or immediate family occupied).
- If the property is used for investment purposes (such as a rental property).
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Comparing Insurable vs. Uninsured Mortgages
Downpayment Requirements: Both insurable and uninsured mortgages require a downpayment of 20% or more, but the key difference lies in whether the mortgage meets the criteria to be insured.
Amortization Period: Insurable Mortgages are limited to a maximum of 25 years for amortization. Uninsured mortgages with prime lending can have a longer amortization period, up to 30 years.
Interest Rates: Insurable mortgages usually offer lower interest rates because the lender can insure them. Due to the lender’s increased risk, uninsured mortgages come with higher interest rates.
Property Type Eligibility: Insurable Mortgages only apply to properties under $1 million that are owner-occupied or occupied by an immediate family member. Uninsured Mortgages only apply to properties over $1 million, second homes not occupied by an immediate family member and investment properties.
Who Pays for Default Insurance on an Insurable Mortgage?
With an insurable mortgage, the lender typically pays for the mortgage default insurance, but some lenders may require the borrower to pay the premium. This insurance, also called portfolio or back-end insurance, allows the lender to bundle the mortgage with other loans within a similar portfolio to mitigate risk. The benefit of this insurance is passed on to the borrower through lower interest rates.
How Do Interest Rates Differ Between Insurable and Uninsured Mortgages?
Interest rates for uninsured mortgages are generally higher than those for insurable mortgages. This is because, without insurance, the lender assumes a greater level of default risk. Insurable mortgages often offer more competitive rates close to what you would be provided with an insured mortgage because the lender can reduce their risk through default insurance, even if the borrower isn’t paying for it.
Benefits of Insurable Mortgages
Lower Interest Rates: Since lenders can insure these mortgages, borrowers often benefit from more competitive rates.
No Premiums for Borrowers: In most cases, the lender will cover the insurance premium. However, some lenders may require borrowers to pay the premium.
Benefits of Uninsured Mortgages
Longer Amortization Periods: With uninsured mortgages, borrowers can opt for an amortization period of up to 30 years with prime lending, which may result in lower monthly payments.
Suitable for Investment Properties: An uninsured mortgage may be your best option if you purchase a rental or investment property.
Higher Loan Limits: Uninsured mortgages allow borrowers to purchase homes valued over $1 million, unlike insurable mortgages that cap at $1 million.
Frequently Asked Questions
What’s the minimum downpayment for an insurable mortgage?
The minimum downpayment for an insurable mortgage is 20% of the property’s purchase price.
What’s the difference between insurable and uninsured mortgages?
Insurable mortgages have default insurance that is either paid for by the lender or the borrower. They also have restrictions like a maximum 25-year amortization and purchase price of less than $1 million. Uninsured mortgages do not require default insurance and allow purchases of properties over $1 million and amortizations of up to 30 years.
Who pays the insurance premium for an insurable mortgage?
The lender typically pays the premium for an insurable mortgage through portfolio insurance, though some lenders may require the borrower to cover the insurance premiums.
Can I get an uninsured mortgage for an investment property?
Uninsured mortgages are commonly used for investment properties, second homes not occupied by the owner or their immediate family members, or properties valued over $1 million.
How does amortization differ between insurable and uninsured mortgages?
Insurable mortgages have a maximum amortization of 25 years, while uninsured mortgages can extend up to 30 years with prime lending.
Final Thoughts
While both types require a 20% down payment, choosing between an insurable and uninsured mortgage hinges on the property value, use, and amortization you want to select. An insurable mortgage could be ideal if you meet the eligibility criteria and want a lower interest rate.
If you’re eyeing a higher-value property, seeking a longer amortization, or plan to use the property for investment purposes, an uninsured mortgage might be the better fit despite higher interest rates.
Contact nesto’s mortgage experts today for personalized guidance to ensure you get the best rate on your insurable or uninsured mortgage.
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