When looking at mortgages, a mortgage can either be one of two things - it can be an insured mortgage or it can be an uninsured mortgage. As these phrases suggest, an insured mortgage is a mortgage with mortgage insurance. On the other hand, an uninsured mortgage is a mortgage without mortgage insurance.
How this affects you is that you’ll need to pay CMHC insurance premiums for an insured mortgage, while the lack of insurance in an uninsured mortgage means that you won’t have to pay additional premiums.
What are insurable and uninsurable mortgages then? This lies more on the side of the lender, as this looks more towards the options available for a lender.
An insurable mortgage is a mortgage that can be insured, but might not currently be insured. An insurable mortgage can be either insured or uninsured. The borrower isn’t required to pay for CMHC insurance premiums, but the lender can choose to get the mortgage insured and pay for the mortgage default insurance premiums themselves.
An uninsurable mortgage is a mortgage that cannot be insured, and so it is not insured. It is not possible for an uninsurable mortgage to be insured, whether or not the borrower or lender wants to insure it.
Insurable mortgages have the same requirements as an insured mortgage, but they are for mortgages with a down payment of 20% or more. Only mortgages with a down payment of less than 20% are required to be insured, which will then be called insured mortgages.
Insurable mortgages will have to meet the following requirements in order to be insurable:
The borrower pays for insurance premiums for an insured mortgage, but pays no insurance premiums for an insurable mortgage.
Uninsurable mortgages are not eligible to be insured if they meet any of the following in the uninsurable category:
|Purchase price less than $1 million||Purchase price of $1 million or more|
|Property is located in Canada||Property is outside Canada|
|Amortization period of 25 years or less||Amortization period that is longer than 25 years|
|Owner occupied residence||Single-unit non-owner occupied rental property|
|New purchase or mortgage renewal||Increasing the mortgage amount when refinancing your mortgage|
|Meets CMHC requirements, including:||Does not meet CMHC requirements, such as:|
Rental properties with more than one unit are insurable, but single-unit rental properties are uninsurable.
When comparing uninsurable vs insurable mortgages, the main difference is how easy it is to be approved. You can get an uninsurable mortgage without having to pass the mortgage stress test by using a private mortgage lender or mortgage broker. This makes an uninsurable mortgage easier to be approved for, as you will always need to pass the stress test for insured and insurable mortgages. Uninsurable mortgages also have less restrictions than insurable mortgages, such as it being used as a rental property, the property price, amortization, your credit score, and your debt levels.
|Can it be insured?||Meets CMHC requirements?||Will you pay CMHC insurance premiums?||Mortgage Rates|
Most likely, the only difference that borrowers will notice between insurable vs uninsurable mortgages would be the mortgage interest rate. Borrowers won’t pay for insurance for both insurable and uninsurable mortgages.
Insured mortgages have the lowest mortgage rates of the three, as the insurance is paid by the borrower. Next is insurable mortgages, with rates being slightly higher than insured mortgages due to the lender possibly paying for insurance themselves. Uninsurable mortgages have the highest risk, and so they will have the highest mortgage rates.
These distinctions are slight, but they can have an impact on your mortgage rates and the total cost of your mortgage.
For example, a $500,000 home with a 10% down payment would be an insured mortgage - the borrower will pay CMHC premiums.
If the borrower makes a 20% down payment, the borrower will not pay CMHC premiums, but may face a slightly higher mortgage rate. The lender can choose to get insurance themselves.
If the $500,000 home is a single-unit rental property, it would be an uninsurable mortgage, even with a 20% or larger down payment. The borrower will face a higher mortgage rate.
However, it’s important to note that even though insured mortgages will have the lowest mortgage rate, the borrower will have to pay CMHC insurance premiums. While the lower interest can partially offset the insurance premium, making a larger down payment on an insurable mortgage can often get you the same rate. For example, making a 35% down payment on an insurable mortgage might have a rate that is comparable to an insured mortgage after premiums paid.
Insurable mortgage rates are higher than insured high-ratio mortgage rates. The difference in interest rates will also depend on the down payment that you make for an insurable mortgage. For example, making a larger down payment for an insurable mortgage will reduce the mortgage rate.
|5-Year Fixed Mortgage Rate||5-Year Variable Mortgage Rate|
|High-Ratio Insured Mortgage||1.58%||1.14%|
(Down Payment Greater than 35%)
(Down Payment of 20%)
Insured mortgages fall under transactional insurance, which is insurance for an individual mortgage. With transactional insurance, the borrower is made aware that their mortgage is default-insured as they will be paying the insurance premiums.
Lenders may choose to get portfolio insurance for their insurable mortgages. Portfolio insurance is also known as bulk insurance, since the lender will be getting insurance to cover multiple mortgages. As this is entirely behind-the-scenes with the lender, the borrower won’t be made aware that the lender is choosing to get insurance on their mortgage, and it won’t impact the borrower as the lender will be the one paying the insurance premiums.
One reason that lenders choose to get portfolio insurance is to protect themselves from mortgage defaults. Even though borrowers of an insurable mortgage will be making a down payment of at least 20%, it doesn't guarantee that they won't default on their mortgage. Having portfolio insurance allows lenders to get optional insurance without requiring the borrowers to pay for it.
Another reason that lenders choose to insure mortgages is for securitization, where the lenders pool mortgages together and sell them off to investors. These pooled mortgages are called Mortgage-Backed Securities (MBS). In Canada, mortgage-backed securities issued by National Housing Act (NHA) approved lenders can be insured by the CMHC.
Securitization is popular amongst B-lenders, such as CMLS, First National, MCAP, and Home Trust. Selling mortgages off as a MBS allows these smaller lenders to originate more mortgages by freeing up capital that would otherwise be tied into these mortgages. This concept led to the proliferation of subprime mortgages in the United States, which eventually led to the subprime mortgage crisis.
All mortgages within a MBS must be insured. That means that the lender will need to get insurance for their insurable mortgages in order for them to be included in a MBS pool. The CMHC allows NHA MBS to have mortgage default insurance from the CMHC or from a private mortgage insurer, such as Canada Guaranty or Sagen. The lender will need to pay for the default insurance on top of CMHC fees for guaranteeing the MBS.
CMHC guarantee fees are charged for NHA MBS in exchange for guaranteeing the interest and principal of these mortgage-backed securities for MBS investors. The mortgage issuers who have bundled these mortgages into a NHA MBS will have to pay the CMHC guarantee fees.
Having the CMHC guarantee a MBS makes it much more attractive for investors. Insurable mortgages can also be used as collateral for Canadian covered bonds registered with the CMHC, however, the CMHC does not guarantee covered bonds.
CMHC guarantee fees depend on the term of the MBS and the size of the MBS. The longer the MBS term, the higher the fee. MBS containing multi-family loans and social housing loans will be eligible for a lower CMHC fee. MBS issuers that have more than $9 billion in MBS guarantees per year will also have to pay a higher CMHC fee.
There is also a CMHC application fee of 2 basis points (0.02%) of the MBS amount.
Below is a snapshot of a few MBS term lengths and the CMHC guarantee fee that would apply as of January 1, 2021. For a full list of terms, MBS pool types, and CMHC fees, visit the CMHC’s website.
|MBS Term Length||CMHC Fee for MBS Issuers Less than $9 Billion/Year||CMHC Fee for MBS Issuers More than $9 Billion/Year|
|1 Month to 6 Months||0.08%||0.22%|
|2 Years 7 Months to|
3 Years 6 Months
|4 Years 7 Months to|
5 Years 6 Months
|9 Years 7 Months to|
10 Years 6 Months
|Above 14 years 6 Months||1.13%||3.15%|
Source: CMHC Guarantee Fees