A conventional mortgage means you pay a down payment of 20% or more of the property value. When you pay a 20% down payment, the lender provides you with a property loan equivalent to 80% of the purchase price. This ratio is known as loan-to-value (LTV).
However, there are different regulations on the mortgage you receive depending on your loan-to-value (LTV) ratio. For example, a mortgage where the lender provides you with a 95% LTV will differ from a 65% LTV. Continue reading to learn everything about conventional mortgages in Canada.
With a conventional mortgage, you are borrowing less money than with a high ratio mortgage. This means your monthly mortgage payments will be lower for a period with the same term.
In an emergency, you can tap into your home equity for cheap cash. This is because the higher down payment can be borrowed in the future. However, you should save this money for emergencies only. You can use secured lending options such as a low-interest home equity line of credit (HELOC), or a second mortgage.
You’ll end up paying less money in interest throughout your mortgage with a higher down payment. Additionally, high-ratio borrowers need to pay extra for mortgage insurance. This can add on 2.80-4.00% to your mortgage, as shown by WOWA’s CMHC calculator. Conventional mortgages do not need to pay for this insurance.
Your down payment provides a safety cushion to the lender in case you default. If you declare bankruptcy, the bank can sell your house at market value to get their money back. With a lower down payment percentage (higher LTV), the bank could risk losing money if they sell your property during a market dip. A higher LTV generally means the lender is taking on more risk. Different types of mortgages have different risks for lenders too. For example, a construction loan is riskier than a conventional mortgage. As a result, the mortgage rate is higher.
Due to the risk of high LTV mortgages - otherwise known as high-ratio - the Canadian government introduced mortgage default insurance through the Canada Mortgage and Housing Corporation mortgage rules. In Canada, CMHC insurance is required by law to protect lenders against mortgage default.
The main difference between these three types of mortgages in Canada is the percentage of your down payment.
|Down Payment||Between 5-19%||20-35%||More than 35%|
A high ratio mortgage typically has a down payment between 5-19% (81-95% LTV). You will need to pay an extra 2.8-4.0% fee for mortgage default insurance.
A conventional mortgage has 20-35% down payment (65-80% LTV). A conventional mortgage will have a lower monthly mortgage payment because the bank is lending you less money.
A low-ratio mortgage has the highest down payment at more than 35%. You should also have the lowest monthly mortgage payment because you are borrowing the least amount of money. It is very easy to qualify because the stress test calculation won’t significantly impact your payments. You may also be able to use down payment assistance programs to increase your down payment amount.
In general, your lender has two goals when qualifying you for a conventional mortgage. Initially, they want to see if you can handle your monthly mortgage payments.
Lenders use the gross and total debt service ratios to determine your mortgage payments aren't too high. They will also conduct a mortgage stress test to ensure you can afford an increase in mortgage interest rates. You will also need to meet a minimum credit score to qualify.
Secondly, your lender will verify that you can handle the down payment along with other upfront costs such as closing costs. To prove you can handle these expenses, your lender will typically ask to see the following required mortgage documents:
For proof of income, you may have to provide:
Your lender will want to see your pay stubs and may contact your employer to ensure that you are employed and earning sufficient amounts of money. Borrowers should also have documentation to show any additional income, such as spousal support or bonuses.
Your lender or mortgage broker in Canada may request recent financial statements from bank accounts or investments. This will assist them in determining whether you have the required down payment.
If you get money from a friend or family member to help with the down payment, you'll need gift letters that state that it's not a loan and has no required repayment. These documents will frequently have to be notarized.
Your debts or financial obligations might include your monthly payments for:
Your lender may need a copy of your driver's license for proof of identification. Additionally, they may want your Social Insurance Number to check your credit score.
Lenders will reward you with the best conventional mortgage interest rate if they see you as a low-risk candidate. Some of the best ways to prove this to them are through the following factors.
A higher credit score demonstrates your history of paying back your loans. The best mortgage terms are reserved for those with a credit score over 740. However, to qualify for a conventional mortgage, you'll want a minimum credit score of 600.
A low debt service ratio means your financial obligations (including your future mortgage payments) will only take up a small percentage of your income. This demonstrates to lenders that you are at a low risk of bankruptcy because you can easily pay your monthly debts.
Ideally, your total debt service ratio should be around 32% and no more than 44%. In other words, you should spend less than 32% of your monthly income on debt repayments.
Higher down payments lowers risk for the lender. As a result, you'll have more negotiation leverage when determining your mortgage rates.
Overall, a conventional mortgage means a mortgage with a down payment between 20-35%. The main benefits are a lower monthly payment and more home equity. If you want to qualify for a conventional mortgage, keep in mind that your potential lender will likely go through several steps before they determine your eligibility.
That depends on your situation. If you can afford the higher down payment, you may qualify for a lower mortgage rate when getting a conventional mortgage than when taking out an insured high-ratio mortgage. High-ratio mortgages are better if you have little money saved for a down payment.
All big five Canadian banks offer conventional mortgages. However, they have the strictest lending criteria. Other lenders that offer conventional mortgages are smaller financial institutions such as credit unions or private lenders.
A mortgage broker will save you time on a mortgage application and may provide you with access to better interest rates. They can leverage their network to find you exclusive mortgages. Additionally, they can benefit your credit score by only requiring one credit inquiry. Whereas applying to multiple banks will result in many credit checks.
In general, those who are just starting their career, persons with more debt than usual, and people with a low credit score have difficulties qualifying for typical loans.
If you are declined for a mortgage, ask for the bank's reasons in writing. You may be eligible for other assistance that will help you get approved for a mortgage. For example, you may qualify for a private mortgage lender or a high-ratio mortgage.
Lenders will review your credit report and loan application to determine the interest rate on your loan. These factors, such as your debt-to-income ratio, can help lenders predict whether you can afford mortgage payments and whether they're at a high risk of a debt default if you take out a loan.