Last week I met my mother for coffee and immediately upon arrival she shuffled through her oversized purse in search of a Ziploc stash of newspaper clippings. Within this pile were articles that mentioned old elementary school friends, tempting vacation packages that could whisk me off to white-sand beaches and of course the usual rock bottom mortgage rates from various brokerages. No offense to my mother, but the latter two clippings are marketed directly to the unsuspecting consumer who is naive and keen enough to, at the very least, inquire. Those who actually take the bait and call travel agents inquiring about these amazing advertised prices are typically disappointed to find out about extreme date, cancellation, and other restrictions. Then that poor consumer wriggles helplessly in an attempt to disengage from the ambitious travel agent, but the hook is usually deeply embedded at this point and the open sea of ignorant bliss slips away. Unfortunately, the same can be said for my very own mortgage industry. The rock bottom rates that you see advertised are typically heavily laden with restrictions unattainable to most. Advertising aggressively low rates is usually done with one intention, to bait and switch potential clients. My hope is to share some information that may provide transparency to advertised low rates and help you to avoid uncomfortable bait and switch experiences.
Advertising aggressively low rates is usually done with one intention, to bait and switch potential clients.
Prior to 2016, most lenders relied heavily on CMHC to provide back-end insurance for conventional loans. Conventional loans are made up of more than 20% equity, insured mortgages are made up of less than 20% equity. In 2016 CMHC (Canadian Mortgage and Housing Corporation) made an effort to slow the Canadian housing market and stopped offering this insurance for conventional loans (>20% equity) and thus it suddenly became very expensive for lenders to fund these mortgages. Banks are in the business of making money so ultimately when costs go up for the bank the consumer always ends up paying more. Now, consumers have to pay more interest for conventional mortgages and are typically unable to qualify for the aggressively low rates my mother pulled out of her purse stash just the other morning. Now you may be wondering, who actually qualifies for those tempting low rates? Well, many variables influence the actual rate a lender will offer a consumer and while it would be impossible to discuss each of these, what I will do is attempt to differentiate the basic mortgage categories.
All scanning eyes should pause here to find the answer you are searching for; Insured Mortgages have the lowest interest rates. Now the challenge lies in meeting the restrictions of an insured mortage. Since 2016, if you are buying with a less than 20% down payment then you have to buy default insurance. This can be automatically rolled into your mortgage payments (or paid at the end) and ultimately protects the lender. If you, the borrower defaults (doesn’t make a payment), then insurance will cover the payment (and if they can’t then CMHC will). Obviously the banks feel very safe with this strategy and share this security by offering the lowest rate to deals that fall into this category. These mortgages carry the lowest risk and are the least expensive for lenders to fund because of the rules CMHC has applied, yet they do carry a variety of restrictions.
An insured mortgage can be referred to as a “high ratio mortgage”, or a “transactionaly insured mortgage” or a “default insured mortgage”. To qualify for an insured mortgage a borrower must have good credit (a credit score of at least 600) as well as proof of steady income. They must plan to live in the property, which must also have a price tag under 1 million dollars. Since this is far from intuitive and causes a great deal of consumer confusion, forgive me for repeating that insured mortgages are for borrowers with less than a 20% down payment. If you have a higher down payment, you will be paying more interest, I will elaborate more on this in the following section.
“…if you have a higher down payment, you will pay more interest”
A lot of people contact us here at Spin with the assumption that having a bigger down payment should earn them a lower mortgage rate. Unfortunately, this is far from true, because of the changes CMHC implemented in 2016 lenders need to pay the insurance premium for borrowers with over 20% down payment (remember with insured mortgages the borrower pays the insurance premium). Lenders will buy the insurance in bulk which lowers their risk and enables them to securitize their mortgages (pool mortgages and sell the cash flow to third party investors as security). Securitizing the mortgages helps lenders to decrease the costs associated with providing funding so in turn, they are able to offer better rates to borrowers (but not as good as insured mortgage rates).
“Insurable mortgage rates are not as low as insured mortgage rates”
This is the category that buyers fall into when they cannot meet the restrictions of insured and insurable mortgages. While borrowers do not have to pay insurance premiums the risk to the lender of defaulting on payments is much higher, so interest rates are also much higher. Uninsurable mortgages are for all purchases over one million dollars, all refinances, all rental properties and amortization periods over 25 years. Unfortunately, I can pretty much guarantee that if you fall into this category none of the advertised low rates will apply to your deal.
“if you have an uninsurable mortgage none of the advertised low rates will apply to your deal”
So the next time you see a dreamy trip to Thailand advertised for an unbelievably low price, you now know better than to pick up the phone and call. Similarly, I hope that after reading this article you will also be a bit warier of advertised low mortgage rates. If you happen to fall into the insured mortgage category and have less than 20% down payment, will be living in the home and are paying less than one million dollars then there is a slim chance that the low rate may apply to you (depending on several other factors). However, if you don’t fit that mold keep your chin up and be proud that you are more knowledgeable now and can see through these bait and switch advertising tactics.