TL;DR: a low down payment and paying for default insurance (CMHC fees) is lower risk to a lender than a 20% down payment and the borrower not paying for default insurance. Lower risk = lower rates. Once the borrower has 35% down, the risk is low enough again for rates to be at the same level as the under-20%-down-payment group. In between 20% and 34.99% down, there are tiers based on credit scores and down payment %.

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In a word, it comes down to risk

Mortgage rule changes at the federal level changed what types of mortgages could be default insured. Along with those changes, the cost to borrowers who had less than 20% down payment also increased.

Most borrowers are conditioned to assume that default insurance premiums do not apply if you have a 20% down payment. Logically this makes a lot of sense. The borrower with 20% down has much more skin in the game than the borrower who has 5% down. The bracket of borrowers with the minimum down payment also happens to be the bracket of borrowers with the highest default (non-payment) rate. 

Here's where it gets tricky

Most of the public is unaware that, in the past, even if you had a 20% down payment there was a decent chance your lender was still insuring that loan in the background. They were buying an insurance policy on your mortgage, bundled with thousands of others. The policy covers them against default, so if and when someone stops paying their mortgage and a foreclosure takes place, the lender is covered for their losses. Grouped with other mortgages with borrowers with good credit, high down payments, and stable employment, the cost to "bulk insure" these relatively lower risk mortgages was cheap. By having this insurance in place, lenders can better manage their risk profile and capital requirements and in turn offer lower rates for borrowers. This allows smaller lenders to be competitive with rates, which increases competition for mortgage business from consumers.

The cost of portfolio insurance (or bulk insurance) has increased significantly over time, and since borrowers are conditioned to expect not to pay default insurance premiums if they have at least 20% in equity or as a down payment, the decision was made to slightly increase the interest rate and not charge the consumer the default insurance premiums. Though the optics don't look great, it is still actually much less expensive for the consumer in the long run not to pay default insurance premiums even if the rate is slightly higher. That may change in the future, and rest assured we'll be doing the math to figure out what works out better for you if any changes to rules or fees should occur.

So what does that mean? What should I expect?

Generally speaking. Your situation may differ.

Purchase of owner-occupied property:

  • 5% to 19.99% down payment - best rates available; must pay default insurance

  • 20% - 34.99% down payment - interest rates are tiered based on credit scores and down payment; no default insurance fees apply

  • 35%+ down payment - best rates available; no default insurance fees apply

Renewal (no changes to amount owed or amortization):

  • you previously paid for default insurance - best rates available; no default insurance applies

  • you did not pay previously pay for default insurance (i.e. you had 20%+ down payment) - need to determine if the mortgage was back-end/bulk insured by your lender. If yes, best rates and no default insurance fees. If no, the rates available will depend on loan to value (the amount of the mortgage compared to the value of the property), credit scores, and other factors. 

Refinance (adding new mortgage funds; lengthening amortization; adding a line of credit):

Not insurable. These types of mortgage transactions no longer qualify for default insurance. This means the interest rates offered will be uninsured rates, which are higher than insured rates.

Rental purchase

No longer insurable unless the property is 2-4 rental units. If the property is 2-4 units, rates are based on a variety of factors, and default insurance premiums may apply. If the property is a single unit rental, rates will be uninsured rates.

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