Insured vs Uninsured Mortgages in Canada
Insured mortgages generally offer the lowest rates. Insurable mortgages can access many of the same funding advantages available to insured mortgages. Uninsured mortgages often carry slightly higher rates because they are more expensive for lenders to fund.
Definitions:
What is an Insured Mortgage?
An insured mortgage is a mortgage with a minimum 5% down payment, but less than a 20% down payment, that requires mortgage default insurance from either CMHC or private insurers like Sagen or Canada Guaranty. Borrowers pay the mortgage insurance premium. Because the lender is protected against borrower default, insured mortgages often qualify for the lowest mortgage rates.
What is an uninsured mortgage?
An uninsured mortgage is a mortgage that does not qualify for borrower-paid or lender-paid mortgage default insurance. These mortgages require a minimum down payment of 20% and are typically used for refinances, higher-value properties, rental properties, or mortgages that fall outside insurer guidelines. They often carry slightly higher interest rates.
What is an insurable mortgage?
An insurable mortgage is a mortgage with at least a 20% down payment that meets mortgage insurer guidelines and can be insured by the lender for funding and capital purposes. The borrower is not required to pay the insurance premium, but the mortgage may still benefit from lower interest rates.
These three categories of mortgage comprise the prime mortgage market in Canada. Where your mortgage fits will have an impact on your approval requirements and, more importantly, the rate you can get on your mortgage.
Key Takeaways
- Insured mortgages usually have the lowest rates.
- Insurable mortgages have 20%+ down payments but still meet insurer rules.
- Uninsured mortgages generally cost lenders more to fund.
- Refinance mortgages are not eligible for mortgage insurance.
- Mortgage pricing depends on insurability, not just down payment.
Why two borrowers with excellent credit can receive completely different mortgage rates.
If mortgage rates are based on risk, why does someone with only 5% down often get a better rate than someone putting 20% down?
This is one of the most confusing realities facing mortgage borrowers in today’s Canadian mortgage market. Common sense tells us that a borrower making a 20% down payment should receive a lower mortgage rate than someone putting down only 5%. A larger down payment protects the lender and reduces their risk, no?
Yet in many cases, the exact opposite happens. A borrower purchasing a home with 5% down may receive a lower rate than a borrower making a 20%, 25%, or even 35% down payment. The reason is that Canadian mortgages are not priced solely on the borrower’s credit score, income, or down payment.
They are priced based on how much risk the lender ultimately carries and what we call ‘liquidity’, meaning how easily the lender can fund that mortgage in the capital markets (which lowers funding costs). The difference between mortgages that are, or can be, insured versus those that cannot has a material impact on risk and liquidity. The end result is that mortgages that are insured present lower overall risk and the lowest funding costs to lenders, resulting in the lowest rates in the market for mortgage borrowers.
Understanding these categories can help you understand how a mortgage lender prices your mortgage.
Why Does Mortgage Insurance Exist?
Regulated financial institutions in Canada are not permitted to place a mortgage on their balance sheet that has a loan-to-value (LTV) ratio above 80%. The LTV ratio is the measure of the mortgage balance divided by the property value. For example, a home worth $500,000 with a mortgage of $400,000 has an LTV of 80% (400,000/500,000 = 0.80%).
One of CMHC’s main mandates is to make housing more accessible. If they could offer a product that protected lenders from the risk of a higher LTV mortgage, they could make housing more accessible to Canadians who do not have substantial savings toward a down payment. Thus, they launched mortgage default insurance.
With mortgage default insurance, a regulated financial institution can originate a mortgage with an LTV up to 95%. Any mortgage they create with an LTV greater than 80% must be insured and the LTV at the time the mortgage was created cannot be greater than 95%. Only then can the lender place the high-LTV mortgage on its balance sheet.
What companies offer mortgage insurance in Canada?
- CMHC – a Federal Crown Corporation of the Government of Canada.
- Sagen – a private insurance company.
- Canada Guaranty – a private insurance company.
It is important to note that mortgage default insurance protects lenders against borrower default. This insurance does not protect the borrower in the event of default but it still benefits borrowers by making it possible to purchase a home with as little as 5% down payment. See our overview of mortgage default insurance here - mortgage-default-insurance
The Three Prime Mortgage Categories Explained
Although people often talk about insured versus uninsured mortgages, lenders think about mortgages in three categories.
1. Insured Mortgages
An insured mortgage has:
- Minimum down payment of 5% on the first $500,000 of property value and 10% on the balance
- Loan-to-value ratio above 80% (i.e. down payment no greater than 20%)
- Mandatory default insurance
- Secured by a property valued no greater than $1.5 million
- The property is owner-occupied (by borrower or family member)
The borrower pays an insurance premium for the mortgage default insurance. This premium is added to the mortgage balance, so the borrower effectively borrows the money for the premium at the mortgage rate and pays it over time.
The typical borrowers needing mortgage default insurance include:
- First-time homebuyers
- Young professionals
- Buyers entering expensive urban markets
- Households wanting to preserve savings
The advantages of mortgage default insurance include:
- Lower rates – lenders charge less for insured mortgages
- Smaller down payment requirement
- Easier access to homeownership
- Greater lender competition – smaller lenders can be more competitive in the insured mortgage market than in the conventional mortgage market
The potential disadvantages when using mortgage default insurance include:
- Insurance premium is paid by the borrower
- Less equity in the house initially, given the lower down payment
- Maximum purchase price restrictions
2. Insurable Mortgages
This is the category that most consumers have never heard of. However, it is arguably the most important category in mortgage pricing today.
An insurable mortgage has:
- 20% or more down payment
- Meets insurer guidelines
- Can potentially be insured by the lender
- Secured by a property valued no greater than $1.0 million
- The property is owner-occupied (by borrower of family member)
Unlike an insured mortgage, the borrower does not pay the insurance premium. The reason for this is that it is the lender’s choice whether to insure the mortgage and the borrower can obtain a mortgage without insurance because they have a down payment of at least 20%.
Uninsured, Uninsured & Insurable Mortgage Comparison
| Feature | Insured | Insurable | Uninsured |
|---|---|---|---|
| Down Payment | Min 5% | Min 20% | Min 20% |
| Insurance Required? | Yes, paid by borrower | Yes, paid by lender | No |
| Property Value Limits | $1.5 million | $1.0 million | No limit |
| Typical Rates | Lowest | Same or 0.1% to 0.3% higher than insured rates | 0.25% to 0.50% higher than insured rates |
| Refinance Eligibility | No, but renewal ok | No, but renewal ok | Yes |
| Securitization Eligibility | Yes | Yes | Limited |
Why Would a Lender Pay for Mortgage Default Insurance?
The lender may choose to insure the mortgage for funding and capital purposes. The mortgage insurers allow lenders to insure conventional mortgages that meet the insurer’s underwriting guidelines. The lender pays the insurance premium but benefits in several ways:
- Lower capital requirements for insured mortgages
- Reduced risk exposure due to loss coverage in the event of borrower default
- Better liquidity since more funding programs work with insured mortgages
- Access to mortgage securitization programs that exclude uninsured mortgages
As a result, the lender’s overall cost of funding is lower for insurable mortgages. Lower funding costs often mean lower mortgage rates. While insurable mortgage rates are not usually as low as insured mortgage rates (where the borrower pays the insurance premium), they are better than conventional, uninsured mortgage rates. This is one reason why borrowers putting 20% down sometimes receive rates nearly as low as insured borrowers.
What is the Role of Mortgage Securitization
This is rarely discussed in consumer articles, but it is one of the biggest reasons insured and insurable mortgages are popular with lenders and should matter to borrowers.
Approximately $650 billion of mortgage securitization exists in Canada (sources: CMHC and Morningstar DBRS). The bulk of this is insured and insurable mortgages (there is some uninsured and multi-family housing securitization in Canada as well). Most of the insured and insurable mortgage securitization in Canada is done via a government-sponsored securitization system.
Insured mortgages can be packaged into pools through programs such as National Housing Act Mortgage-Backed Securities (NHA MBS) and Canada Mortgage Bonds. These programs provide lenders with efficient funding sources and help increase competition in the mortgage market. More than 20% of Canada’s total residential mortgage market is funded in these programs.
What is Mortgage Securitization? Think of it this way:
- A lender originates a mortgage.
- Instead of keeping it on their balance sheet for 25 years, they can package qualifying insured loans, sell securities backed by these loans, and obtain funding from investors. That frees up their own capital to be used to make more mortgages. This increases the liquidity in the mortgage market, making it easier for a lender to fund a mortgage, which improves the business economics so they can offer lower mortgage rates
3. Uninsured (Conventional) Mortgages
An uninsured mortgage has:
- 20% or more down payment
- Does not qualify for mortgage default insurance
- Does not qualify for lender-paid mortgage default insurance
The lender takes on the risk of the mortgage without any insurance protection. These mortgages tend to require the lender to hold more regulatory capital and are generally more expensive to fund. As a result, uninsured mortgage rates are often higher.
What Makes a Mortgage Uninsurable?
Many consumers believe putting 20% down automatically qualifies them for the best rate. That idea does make common sense, but it is, unfortunately, not the case.
A mortgage may be uninsurable because:
- Property value exceeds Insurance limits - CMHC currently allows insured mortgages on owner-occupied properties below a $1.5 million purchase-price (this limit is $1.0 million for lender-paid insurable mortgages).
- The purpose of the mortgage is to refinance an existing mortgage
- Rental properties
- Extended amortizations longer than 30 years (making it a non-prime mortgage)
- Certain amortization structures fall outside insurer guidelines.
- Non-Standard Properties
This is why refinance rates are frequently higher than purchase rates.
Why Do Mortgage Rates Differ Among Categories?
Lenders price mortgages based on multiple factors.
- Risk
- Insurance removes much of the lender’s potential loss.
- Capital Requirements
- Regulators require lenders to hold capital against risk.
- Less risk means less required capital and insurance lowers the risk.
- Funding Costs
- Insured mortgages have better access to economical capital markets funding.
- Market Liquidity
- Insured mortgages are easier to securitize and sell to investors.
Collectively, these benefits often produce a pricing hierarchy that looks like this:
| Category | Typical Rate Level |
|---|---|
| Insured | Lowest |
| Insurable | Very Competitive |
| Conventional (Uninsured) | Highest |
Common Mortgage Insurance Myths
Myth #1: Mortgage Insurance Protects the Borrower
It protects the lender, not the borrower.
Myth #2: 20% Down Guarantees the Best Rate
Not true. Insurability matters more than down payment size for mortgage pricing.
Myth #3: The Cost of Mortgage Insurance Is Not Worth It
Not necessarily. Many borrowers save tens of thousands in interest costs and enter the market years earlier because of insured financing.
Myth #4: Wealthier Borrowers Always Get Better Pricing
Not always. Mortgage structure and insurability frequently matters as much as borrower financial strength.
Which Prime Mortgage Category is Best for Borrowers?
Insured mortgages are best for:
- First-time homebuyers
- Buyers with less than 20% down
- Buyers of properties worth $1.5 million or less
- Borrowers seeking the lowest rates available
Insurable Mortgages are best for:
- Buyers with 20%+ down
- Strong credit borrowers
- Buyers of properties worth $1.0 million or less
- Homeowners seeking top-tier pricing without paying insurance premiums
Uninsured mortgages are best for:
- Larger, more expensive properties
- Refinances
- Rental properties
- Alternative credit profiles
- Complex mortgage scenarios
Frequently Asked Questions
Is an insured mortgage safer?
For the lender, yes. For the borrower, not necessarily, but the lower rate is better for borrower cash flow.
Why are refinance rates often higher?
Refinances are uninsured because they result in a change of mortgage terms, cancelling any mortgage insurance that mat have been in place. Thus, they cannot access the same funding advantages.
Can a 20% down payment mortgage have a worse rate than a 5% down payment mortgage?
Absolutely. This is normal in Canada. Mortgages with down payments less than 20% must have mortgage insurance. This insurance lowers the risk and makes the mortgages easier to fund, allowing lenders to offer lower mortgage rates.
Should I put down less than 20% to get a lower rate?
Not automatically. The insurance premium must be weighed against any rate savings. Plus, the 20% down payment means a smaller mortgage that you may be able to pay off faster.
What matters more: down payment or insurability?
From a lender-pricing perspective, insurability is often the more important variable.
Final Thoughts
A mistake Canadians can make when shopping for a mortgage is assuming all prime mortgages are essentially the same. They’re not.
Behind every mortgage rate is a complex combination of insurance eligibility, lender capital requirements, securitization opportunities, regulatory treatment, and credit risk.
For borrowers, understanding the difference between insured, insurable, and uninsured mortgages can help you understand why two lenders quote different rates, why a refinance often costs more than a purchase, and why someone with only 5% down may receive the lowest rate in the market.
That knowledge alone can provide essential information needed for you to make the best decision about your mortgage.
For help with understanding these issues or anything else regarding your mortgage, reach out to Frank Mortgage at 1-888-850-1337. We are online at www.frankmortgage.com.
