Logically-ILLogical Mortgages?

It was only a short time ago that having a significant downpayment towards a home purchase, or otherwise having equity in a home, was actually rewarded by mortgage lenders translating to favourable interest rate terms. Logic would dictate that as a borrower accumulated more equity or vested financial interest in a home, that the lenders reduced risk, would translate to a lower interest rate for the borrower on their mortgage. Well, since some significant changes orchestrated by the government in late 2016 with respect to mortgage insurance (ie. CMHC, Genworth etc.), you can safely throw that old “logical” way of thinking completely out the window!

In today’s new mortgage world, believe it or not, having a significant downpayment can actually penalize you and increase your borrowing costs! Having 20-35% down or equity (ie. when refinancing) will generally lead to a slightly higher mortgage interest rate than those that have a more modest home equity. The reason for this apparent illogical risk/return trade off stems from the fact that when you have more than 20% down, the lender is “Uninsured” (ie. a insurer, such as CMHC, does not guarantee the mortgage), which translates to a higher perceived risk in the eyes of the lender. Conversely, an “Uninsured” or “Conventional” mortgage will see the lender still maintain some risk, should the mortgage not be paid as agreed. The borrower with significant equity will of course not incur the costs of the mortgage insurance premium itself, but again will be offset somewhat by a modestly higher interest rate as many mortgage lenders will consider this type of lending less desirable, more risky etc. as compared to the coveted “Insured” deal. To compensate themselves for this higher “Uninsured” risk, whether perceived or real, lenders will generally charge a .1-.3%/year premium on the interest rate to compensate themselves and their investors for this risk.

Does this make sense? Is it fair? Is it logical or even rationale? Well, the short answer is Yes and No.. But does it really matter? If you have 20-35% downpayment or equity in a home, you can expect a slightly higher interest rate than those “Insured” borrowers that have minimal down! The reality is there are less options and more costs for those with equity in their homes than there ever used to be. You can also expect less choice as mortgage lenders (and brokers for that matter) drool over the coveted “Insured” mortgage borrower, as the conventional borrower gets the proverbial shaft so to speak.

As a mortgage broker, I constantly stay up to speed and have relationships with all of Canada’s top mortgage lenders, to ensure that regardless of the situation, the absolute best terms possible are always delivered to my client. Regardless of whether my client’s situation is the Gold Standard “Insured”. “Uninsured”, “Unisurable”, Self-Employed, or credit impaired, I work towards navigating this market on their behalf and deliver them the best product and advice possible from this wonky mortgage landscape we are currently in.

If you would like additional backround, explanation, or clarification, or need someone to shed some Logic on the otherwise Illogical mortgage market, please reach out to the author Alan Fetterly, Mortgage Professional and Certified Financial Planner with any of your questions.