Mortgages – Insured vs Uninsured
As of January 1st, 2018, Canadian Home Buyers will have to endure stricter guidelines when applying for a mortgage, be it insured or uninsured.
We already have these in place for insured mortgages (those with less than 20% down payment) but now we are going to see this with uninsured mortgages too, and Canadians will have to qualify for a mortgage that is 2 percent higher than that which they are applying for. With a high rate of uninsured mortgages (around 45%) this could potentially rock the market.
But first let’s have a look at what it means to be insured or uninsured.
Typically these types of mortgages are required by lenders who put down less than 20% of the purchase price, thus protecting lenders against mortgage default and allowing buyers to purchase homes with a minimum down payment of 5%. The lenders will pay an insurance premium, and will pass this cost on to the buyer, which can be paid upfront in a lump sum or added to the mortgage payments, however the lender is the beneficiary as the insurance protects the loan giver not the borrower. Due to the many costs involved in purchasing a property, adding the insurance to the mortgage can be extremely helpful. The premium that you pay is based on a percentage of the home’s purchase price that is to be financed by the mortgage.
An uninsured mortgage is one that requires a minimum of 20% down payment, so for example when purchasing a $500,000 property, a consumer would need a minimum of $100,000. These types of mortgages are the ones who are going to be put under the ‘stress test’ come January 1st, 2108. The reason for this is to ensure the borrower is capable of repaying their loan if interest rates increase.
The new ‘stress test’ will not apply to mortgage renewals as long as the consumer remains with the same lender, whilst experts are suggesting it will enhance the resilience of the Canadian Banking System in a rising interest rate environment. The market is likely to cool in January, after a busier December, as people rush to avoid the new stress test.