WHY ARE THERE DIFFERENT MORTGAGE RATES?
We are not referring to the fixed-rate vs variable-rate mortgages. As that difference is obvious, one locks you into a long-term fixed rate the other varies depending on the prime lending rate.
“I SAW A LOWER RATE ONLINE!”
Everyone wants the lowest mortgage rate available. But it might be beneficial to understand who that lowest rate advertised applies to and why. I always get told, “I saw a lower rate online”. Here is the explanation of why that rate may not apply to you.
First, you need to understand some mortgage terminology. Insured, Insurable, and Uninsured mortgages.
INSURED – Insured mortgages, also known as High-Ratio mortgages are for properties that are purchased with less than 20% down payment. BORROWERS have to pay for the mortgages to be ‘insured’ by a mortgage default insurer. In Canada, there are 3 main insurers, CMHC, Genworth, and Canada Guaranty. Clients pay up to 4.0% of the mortgage amount, which typically gets added to the mortgage. This type of mortgage has the lowest rate.
INSURABLE – Insurable mortgages are for properties that are purchased with a 20% down payment or more but still fall under insurer guidelines to be insured. Some of the criteria for a mortgage to be insurable are properties under $1MM and mortgages amortization of 25 years or less. There is a small premium for an insurable mortgage that are paid by the LENDER, not by the borrower. As the lender pays for these mortgages to be insured, the rates for this type of mortgage tend to be slightly higher than the insured mortgages but lower than the uninsured mortgages.
UNINSURED – As the name suggests, uninsured mortgages are NOT insured by any insurer. These are approved directly by lenders. Mortgage refinances fall under this category. As it is not insured against borrowers defaulting on payments, lenders are taking more of a risk, therefore these mortgages have higher rates than the insured and insurable mortgages.
Now we have a better understanding of the different types of mortgages. As you can see, an Insured mortgage has the lowest rate as YOU, the client, are paying thousands of dollars to have these mortgages insured. In summary, lenders have less risk on insured mortgages with no cost to them and in turn, are able to offer the lowest rates for these mortgages.
If you have further questions or want to know which mortgage rate applies to you, do not hesitate to contact me!