Financial institutions grant different types of loans. In terms of mortgage financing, they have developed a range of products, in accordance with the law, their regulations and policies, etc. As a result, the appellations are multiplying and many no longer find themselves there.
Without going into detail on each of the options available to borrowers, let’s provide an overview of the main types of mortgage loans.
1- Conventional mortgage loan
The best known, the conventional loan is intended for buyers able to make a minimum down payment of 20% for the purchase of a property. Amortized over 25 years, for a term generally of 3 or 5 years, it will be chosen at the rate:
a) fixed, hence the term conventional fixed rate loan, which means that the rate will not fluctuate during the chosen term, or
b) variable, which is referred to as a conventional variable rate loan, which implies that during the term, increases and decreases in the Bank of Canada’s key rate will affect its value.
2- Insured mortgage loan
The insured loan is often confusing. Who insures what exactly? When the borrower does not meet certain conditions, including a minimum down payment of 20% of the purchase price of the house, the financial institution takes out insurance with CMHC, Sagen or Canada Guaranty to protect its capital. However, it passes on the premium (plus taxes) to the borrower who can add these costs to the loan he takes out (excluding taxes). So it is not the borrower who is insured, but the lender. This is why the interest rate of the insured mortgage loan will be the lowest offered, because the institution runs less risk of losing its principal. Highlights :
- Minimum down payment: 5% of the value of the house
- CMHC insurance premium borne by the borrower
- Exclusions: $1 million+ homes, non-owner occupied properties, refinances
3- Insurable mortgage loan
Unlike the previous situation, the borrower here has a down payment of more than 20% of the purchase price of the house. In such a case, the mortgage loan insurance is not mandatory, the borrower does not pay any premium. If the financial institution still wishes to take out insurance to protect its capital, it can obtain it from a private insurer and pay the premium. This is why the mortgage loan is qualified as insurable, because the financial institution can resort to insurers other than CMHC. Highlights :
- Minimum down payment: 20% or more
- Home value: less than $1 million
- Recourse to a private insurer whose premium is paid by the financial institution
- Maximum amortization: 25 years
4- Non-insurable mortgage loan
As its name suggests, it does not meet the criteria of mortgage insurers, no one can insure this type of loan. Highlights :
- Purchase of non-owner occupied single unit rental properties
- Home value: $1 million or more
- Amortization: more than 25 years
- Refinances, usually for higher risk loans
- Typically offered at higher rates than insured loans
Conclusion
Financial institutions offer a range of mortgage loans with specific characteristics to meet a variety of situations. A borrower will have to analyze these options and choose the one that suits him, not to mention that he will also have to meet various criteria, including presenting a credit score greater than 600 and passing a mortgage stress test. Above all, do not let yourself be stunned by all the names. The important thing is to understand them well in order to select the mortgage loan that meets your needs.
Advice
- Prepare: Make sure you have a good credit rating and are financially ready for the mortgage stress test.
- Some lenders are more flexible than others, ask for advice: Do not hesitate to ask for help from a mortgage advisor.
- Consider your long-term plans: Each type of mortgage may be more or less suitable depending on your future plans.