Insured vs. Uninsured Mortgages: Which Option is Best for Canadians?

In Canada, mortgages are a popular way for people to afford their dream homes. However, when it comes to choosing between insured and uninsured mortgages, many Canadians find themselves at a crossroads. Each option has its own advantages and disadvantages, making it crucial for potential homeowners to understand the differences before making a decision.

Understanding the Basics of Mortgages in Canada

A mortgage is essentially a loan that is used to finance the purchase of a property. It is a legal agreement between a borrower and a lender, where the borrower pledges the property as security for the debt. The lender, usually a bank or a mortgage broker, provides the funds needed to purchase the property, and the borrower agrees to repay the loan plus interest over a specified period of time.

What is a Mortgage?

Simply put, a mortgage is a way for Canadians to buy a home without having to pay the full purchase price upfront. Instead, they make a down payment on the property and borrow the remaining money from a lender. This allows people to become homeowners sooner than if they had to save up the entire purchase price.

When it comes to mortgages, there are different types that borrowers can choose from. The most common types of mortgages in Canada are fixed-rate mortgages and variable-rate mortgages. A fixed-rate mortgage has an interest rate that remains the same throughout the entire term, providing borrowers with stability and predictability in their monthly payments. On the other hand, a variable-rate mortgage has an interest rate that fluctuates with the market, which means that borrowers’ monthly payments may change over time.

Another important aspect of mortgages is the amortization period, which refers to the length of time it takes to pay off the mortgage in full. In Canada, the maximum amortization period for a mortgage with less than a 20% down payment is typically 25 years. However, borrowers who have a down payment of 20% or more can qualify for a mortgage with a longer amortization period, which can help lower their monthly payments.

The Role of Default Insurance in Mortgages

In Canada, mortgage default insurance is required for homebuyers who have a down payment of less than 20% of the purchase price. This insurance protects the lender in case the borrower defaults on the mortgage. It’s important to note that mortgage default insurance does not protect the borrower; it solely benefits the lender.

There are three main providers of mortgage insurance in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. These insurance providers assess the risk associated with each mortgage application and determine whether or not to approve the insurance. The cost of mortgage insurance is typically added to the borrower’s mortgage payments.

It’s worth mentioning that mortgage insurance is different from mortgage life insurance. While mortgage insurance protects the lender, mortgage life insurance is designed to protect the borrower and their family in the event of the borrower’s death. This type of insurance ensures that the mortgage will be paid off in full if the borrower passes away, relieving the financial burden on their loved ones.

Insured Mortgages: An Overview

An insured mortgage is a mortgage that is backed by mortgage default insurance. This type of mortgage is typically required for homebuyers who have a down payment of less than 20% of the purchase price. While the insurance adds an extra cost to the mortgage, it also offers certain benefits and protections to both the lender and the borrower.

Insured mortgages play a vital role in the housing market by providing opportunities for individuals and families to become homeowners, even if they don’t have a substantial down payment. This accessibility is particularly beneficial for first-time homebuyers who are just starting to build their financial foundation.

When a borrower secures an insured mortgage, the mortgage insurance provider guarantees the lender that they will be repaid in the event of default. This guarantee allows lenders to offer more flexible lending terms, such as lower down payments. As a result, insured mortgages are generally more accessible to first-time homebuyers and those with limited down payment savings.

How Does an Insured Mortgage Work?

When a homebuyer approaches a lender for a mortgage, the lender assesses whether the homebuyer meets the general requirements to qualify for mortgage default insurance. This includes their financial situation, down payment amount, and the minimum credit score to get a mortgage in Canada. If the down payment is less than 20% of the purchase price, the lender will require the borrower to obtain mortgage default insurance.

Once the borrower agrees to obtain mortgage default insurance, the lender contacts an approved mortgage default insurance provider to insure the mortgage. The insurance provider evaluates the borrower’s application and determines the level of risk associated with the mortgage. Based on this assessment, the insurance provider sets the premium, which is typically a percentage of the mortgage amount.

With the mortgage insurance in place, the lender can proceed with approving the mortgage and disbursing the funds to the homebuyer. In the event of default, the lender can file a claim with the mortgage insurance provider to recover the outstanding balance. This guarantee provides peace of mind to lenders, encouraging them to offer more favorable terms to borrowers.

Pros and Cons of Insured Mortgages

Like any financial product, insured mortgages have their advantages and disadvantages. Let’s explore them in detail.

One of the main advantages of an insured mortgage is the ability to make a lower down payment. This can be a significant benefit, especially for first-time homebuyers who may not have substantial savings. By allowing a lower down payment, insured mortgages enable individuals and families to enter the housing market sooner and start building equity in their homes.

Additionally, insured mortgages often have lower interest rates, making them more affordable in the long run. The combination of lower down payments and lower interest rates can significantly reduce the financial burden on homebuyers, allowing them to allocate their resources towards other essential expenses or investments.

However, there are also some downsides to consider. Firstly, the cost of mortgage insurance can add up over time, increasing the overall cost of the mortgage. While the accessibility provided by insured mortgages is valuable, borrowers must carefully evaluate the long-term financial implications of the insurance premiums.

Furthermore, being required to pay for mortgage insurance may limit a borrower’s purchasing power, as it reduces the amount they can borrow. This limitation can impact the type of property that a homebuyer can afford or the location they can choose. It’s important for borrowers to factor in the potential trade-offs between a lower down payment and the property they desire.

Despite these considerations, insured mortgages continue to be a popular choice for many homebuyers, especially those entering the housing market for the first time. The benefits of increased accessibility and lower down payment requirements often outweigh the potential drawbacks.

Uninsured Mortgages: A Closer Look

An uninsured mortgage, as the name implies, is a mortgage that is not backed by mortgage default insurance. This means that the lender bears a higher level of risk if the borrower defaults on the mortgage. Uninsured mortgages are available for homebuyers who have a down payment of 20% or more of the purchase price.

Understanding Uninsured Mortgages

With an uninsured mortgage, the lender does not have the guarantee of mortgage insurance. As a result, they may impose stricter lending terms, such as higher interest rates, shorter amortization periods, and larger down payments. These requirements are meant to mitigate the increased risk on the lender’s part.

When a borrower opts for an uninsured mortgage, they are essentially taking on a greater responsibility and demonstrating their financial stability. This can be seen as a positive aspect, as it shows that the borrower has the means to afford a larger down payment and potentially handle higher interest rates.

Advantages and Disadvantages of Uninsured Mortgages

One of the main advantages of an uninsured mortgage is that it allows borrowers to avoid the costs associated with mortgage insurance. This can result in substantial savings over the life of the mortgage. Additionally, borrowers who have a larger down payment can often negotiate better terms, such as lower interest rates.

Moreover, an uninsured mortgage provides borrowers with the opportunity to build equity in their homes more quickly. By making a larger down payment, borrowers can reduce the principal amount of the mortgage, resulting in a lower loan-to-value ratio. This, in turn, can lead to better financing options in the future and potentially save the borrower thousands of dollars.

However, it’s important to consider the potential downsides as well. Without mortgage insurance, lenders may be more strict with lending criteria, making it more difficult for some borrowers to qualify for an uninsured mortgage. Additionally, the higher down payment requirement may delay homeownership for those who do not have substantial savings.

Furthermore, borrowers should be aware that the lack of mortgage insurance means that they are solely responsible for any potential losses in the event of default. This can be a significant risk, especially if the borrower’s financial situation changes unexpectedly, such as job loss or illness.

Comparing Insured and Uninsured Mortgages

Now that we have a better understanding of insured and uninsured mortgages, let’s compare the two options to determine which one may be best for Canadians.

Key Differences Between Insured and Uninsured Mortgages

The main difference between insured and uninsured mortgages lies in the down payment requirements. Insured mortgages allow borrowers to make a lower down payment, while uninsured mortgages require a down payment of at least 20%. 

Another difference between insured and uninsured mortgages is the interest rate. Generally, insured mortgages have lower interest rates compared to uninsured mortgages. This is because the insurance protection reduces the risk for the lender, allowing them to offer more favorable lending terms.

Mortgage Rates in Québec, August 2023

Term	Insured	Uninsured
1-Year Fixed	6.24%	6.44%
2-Year Fixed	6.09%	6.34%
3-Year Fixed	5.74%	5.79%
4-Year Fixed	5.39%	5.39%
5-Year Fixed	5.21%	5.24%

Which Mortgage Type is More Expensive?

While insured mortgages may have lower interest rates, they can still come out more expensive because the borrower also has to pay interest on the insurance premium. Let’s take a look at an example in the table below. The property price is $300,000, the interest rate is 5%, and the amortization period is 25 years.

Borrower	Arthur (Insured Mortgage)	Justin (Uninsured Mortgage)
Downpayment	19% ($57,000)	20% ($60,000)
CMHC Insurance	$6,804	$0
Mortgage Amount	$243,000 + $6,804	$240,000
Total Interest on Loan	$188,295	$180,905
Monthly Payments	$1,460	$1,403
Payment Total	$438,099	$420,905

As you can see from the table above, when requiring the CMHC insurance, the total payments over the 25-year period increase noticeably even if the initial downpayment differs only slightly. If Arthur from the table above chose to add another $3,000 to his down payment, he would save $17,194 on his total payment after 25 years. To get an idea of what your mortgage plan might entail, you can simply use a mortgage calculator.

Making the Right Choice: Factors to Consider

When deciding between an insured and uninsured mortgage, there are a few key factors to consider. Taking the time to assess your financial situation and consider your long-term goals can help you make an informed decision.

Assessing Your Financial Situation

Before selecting a mortgage type, it’s crucial to thoroughly examine your financial situation. Take into account your current income, expenses, and savings. Assess whether you can comfortably manage a larger down payment or if a lower down payment aligns better with your circumstances. Additionally, it’s wise to check your credit score to determine if mortgage default insurance is necessary.

Considering Your Long-Term Goals

Think about your long-term goals for homeownership. Are you planning to stay in your new home for the long haul, or do you foresee needing to sell within a few years? Calculating your CMHC mortgage default insurance can help you determine whether the cost savings of an uninsured mortgage outweigh the benefits of an insured mortgage.

Insured vs. Uninsured Mortgages: The Bottom Line

Ultimately, the decision between an insured and uninsured mortgage is a personal one that depends on your individual circumstances and preferences. While insured mortgages have advantages like a lower interest rate, lower down payment requirements, and protection in case you default on your mortgage, insured mortgages have the advantage of requiring no insurance premium payments, and can also qualify for longer amortization periods that result in lower monthly interest payments. Make sure to compare mortgages in Canada to find a mortgage that best suits your needs and financial situation.