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Understanding mortgage pricing can seem a bit daunting when you’re unfamiliar with important industry terms and can’t quite grasp how rates are created. We’ve broken it down to demystify the process and give you more insight into how mortgage pricing works overall:
Insured Vs. Insurable Vs. Uninsurable
How much you’ll pay for a mortgage depends on whether it’s an insured, insurable or uninsurable mortgage. Let’s break these down further:
An insured mortgage is one where you’re required to pay mortgage default insurance premiums. This is most often when you’re putting down less than 20% on a property. Because of this, the mortgage is fully guaranteed for the lender by the mortgage insurer (CHMC, Genworth or Canada Guaranty). As such, insured mortgages tend to come with the lowest mortgage rate (although that’s offset by the mortgage default insurance you’ll pay).
An insurable mortgage, commonly referred to as a conventional mortgage, is a mortgage where you’re putting down 20% or more. The mortgage insurers still guarantee the mortgage; however, the lender pays for the mortgage default insurance premiums instead of the borrower. Because of this, insurable mortgages tend to have slightly higher rates than insured mortgages.
Uninsurable mortgages are mortgage types that are ineligible to be guaranteed and will include purchases over $1 million, 30-year amortizations and refinances. Because of this, uninsurable mortgages tend to come with the highest mortgage rate of all three types.
Despite the fact that you may have the income and the down payment, your credit score is a key factor in getting approved. If it isn’t high enough, you may qualify for certain mortgage products which could involve a co-signer, or mortgage financing from an alternative lender who likely has a higher mortgage rate.
If you’re concerned about your credit score, consider signing up for Borrowell, an app that monitors your credit score regularly and provides customized tips to help with your current situation.
The type of property you choose could also determine your mortgage rate. There are three main property types: owner-occupied, second homes and rental properties. Owner-occupied is your principal residence, whereas a second home is one you plan to occupy in addition to your principal residence and rental property is one that you intend to lease to tenants who pay rent in exchange for occupying the property.
Owner-occupied properties typically come with the lowest mortgage rate. Some lenders offer mortgages on second homes, often at the same mortgage rate as owner-occupied properties. Rental properties, on the other hand, tend to come with the highest mortgage rate.
If you’re unsure of how this is relevant think of it like this; If you were to run into financial difficulty and you owned your primary residence and a rental property, which property do you think you would prioritize paying the mortgage? Since most people would opt to keep a roof over their own heads first, rental properties carry slightly more risk for lenders, hence the higher mortgage rate.
Loan-to-Value is a common term used by mortgage brokers and bankers. It’s used to express the percentage of the mortgage to the value of the home.
For example, if you bought a home for $500,000 with a $100,000 down payment, that would leave you with a $400,000 mortgage. In that case the Loan-to-Value would be 80% ($400,000 mortgage / $500,000 purchase price = 80% Loan-to-Value).
Mortgages with a Loan-to-Value above 80% (insured mortgages) and those with a Loan-to-Value below 65% tend to come with the best mortgage rates.
There are also other factors that could influence the pricing of a mortgage:
- Whether the mortgage is fixed or variable.
- Whether it’s a purchase, transfer/switch or refinance.
- The length of the mortgage term (typically between 1 – 5 years).
Buying a home is a very big and exciting financial decision! If you’re considering buying, make sure you keep an eye on your credit health and stay in control of your finances so you’re as prepared as possible when you find the right home. Want to learn more? We can help! Contact us today.