How many times have you seen an advertised interest rate and been disappointed that what was advertised does not apply to you? Our team wants to break it down for you and explain how there are different rates for every type of mortgage and how each one is influenced by your down payment.
Borrowers who put down less than 20% of the purchase price of a property (called “high-ratio borrowers”) pay less interest than borrowers who put down 20% or more (called “conventional” borrowers).
What is default insurance and why does it affect my rate?
Default Insurance makes the lender effectively bulletproof against loss. So, if a borrower stops making payments and the lender has to seize and sell their property for less than what they owed on their mortgage, the insurer reimburses the lender for any loss (as long as there wasn’t gross incompetence or fraud during the underwriting stage).
This insurance is offered by three different providers (CMHC, Genworth and Canada Guaranty) and all of their policies are backed in whole or in part by our federal government.
Once a mortgage is insured, lenders can fund it more cheaply, and they pass some of that saving back to borrowers in the form of lower rates. But default insurance is a significant additional cost and the lower rate only offsets your cost of this insurance by a fraction.
Breaking it down…
Purchase with 20% or more down payment
*higher rates on this particular type of mortgage
“Conventional” borrowers
Purchase with less than 20% down payment
*lower rates available for this particular type of mortgage
“High-Ratio” borrowers.
Renewal
*lower rates available for this particular type of mortgage
Renewing your mortgage and continuing all terms except for your rate.
Refinance
*slightly higher rates on this particular type of mortgage
Making any changes to your mortgage.
Rolling in debts, such as a vehicle loan, line of credit etc.
Taking equity out of your home.
Your interest rate will differentiate
Based on the following:
Your credit score.
How much you’re borrowing vs. the value of your home.
The type of mortgage you’re looking to obtain – i.e. refinance, purchase, renewal etc.
Type of property – ie. Farm, Commercial, depreciated residential homes.
Regardless of your interest rate or CMHC fee, homes are a great way to make tax free money.
Below is a break down on an example of a return on investment:
Let’s consider a home that appreciates an average of 2 percent.
Today, your home is worth $400,000. In a year, it’s worth $408,000. Regardless of your down payment, the home is worth eight thousand dollars more.
That down payment affects your rate of return.
With 20% down on the home — $80,000 –your rate of return is 10%
With 5% down on the home — $20,000 — your rate of return is 40%
Call our team at Browne Mortgages + More if you want expert advice and consistent service, educating you as you achieve your mortgage goals!
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