Conventional Mortgages in Canada

A conventional or uninsured mortgage is one option to consider when financing a home in Canada. This type of mortgage requires at least 20% of the property’s purchase price as a down payment, making it ideal for borrowers who want to avoid the added cost of mortgage default insurance. 

Conventional mortgages can provide significant long-term savings through lower monthly payments and no default insurance premiums. You also have greater flexibility with home equity options and refinancing, as your property will have more equity from the start.

Key Takeaways

• Conventional mortgages require a minimum 20% down payment. 
• Due to a higher down payment, these mortgages do not require mortgage default insurance. 
• A higher down payment can increase savings on interest-carrying costs.

What Is a Conventional Mortgage?

Conventional or uninsured mortgages require borrowers to make a down payment of at least 20% of the purchase price. This higher down payment eliminates the need to purchase mortgage default insurance, as the lender’s risk is mitigated by the higher amount put down. 

How Does a Conventional Mortgage Work?

With a conventional mortgage, the lender finances up to 80% of the property’s value, while the borrower contributes the remaining 20% or more as the down payment. This allows the borrower to avoid the additional cost of mortgage default insurance, mandatory for down payments of less than 20%. 

For example, if you purchase a property for $400,000 and want a conventional or uninsured mortgage, you must put down at least $80,000 (20%) as a down payment. The lender would finance the remaining $320,000 (80%) as your mortgage amount. 

Advantages of a Conventional Mortgage

Choosing an uninsured mortgage comes with several advantages for borrowers, including:

• No Mortgage Default Insurance: Avoiding default insurance premiums can lead to significant savings over the life of your mortgage. Default insurance premiums can add up to 0.6% to 4% to your total loan amount, depending on your loan-to-value (LTV) ratio.
• More Home Equity: A higher down payment gives you more equity in your home from the start. This allows you to take advantage of the equity built much sooner, which can be beneficial if you plan to take out a home equity line of credit (HELOC) in the future. 
• Lower Mortgage Payments: A larger down payment reduces the amount you need to borrow, leading to smaller mortgage payments. 
• Interest Savings: The total interest you will pay is based on your interest rate, amortization, and mortgage principal balance. Since you reduce the principal balance with a larger down payment, you will pay less interest over the life of your mortgage.
  

Disadvantages of a Conventional Mortgage

While conventional mortgages offer many benefits for borrowers, there are some disadvantages to choosing this mortgage option. 

• Higher Upfront Cost: Since you require 20% or more down, this can equate to a significant amount of money upfront. A higher down payment could be a barrier for those without significant savings, like first-time buyers. 
• Potentially Higher Interest Rates: Since uninsured mortgages aren’t backed by mortgage default insurance, interest rates are typically slightly higher than insured or insurable mortgages. 

Conventional Mortgage vs. High-Ratio Mortgage

When choosing a mortgage in Canada, you may consider a high-ratio or insured mortgage as an option over conventional. Here’s how conventional and high-ratio mortgages compare:

Conventional Mortgage 

This type of mortgage requires a down payment of 20% or more and does not require mortgage default insurance. It offers more flexibility in terms of property value as you are not capped at a $1.5 million purchase limit. Interest rates may be higher unless you put 35% or more down; however, a lower mortgage amount and no default insurance premiums lower your mortgage payments and reduce interest-carrying costs. 

High-Ratio Mortgage

This type of mortgage requires a down payment of 5% to less than 20% and mortgage default insurance. With a high-ratio mortgage, you are limited to a purchase price of less than $1.5 million and an amortization of 25 years unless you are a first-time homebuyer or purchasing a new build. Interest rates are typically lower than conventional mortgages. However, a higher mortgage amount and default insurance premiums, when included in your mortgage amount instead of paid upfront, can increase interest-carrying costs.

Interest Rates on Conventional Mortgages

Interest rates on conventional mortgages will vary based on many factors, including:

• Credit Score: If you have a higher credit score, you may be able to secure better rates.  
• Length of Term: The mortgage term you choose (3 years, 5 years, 3tc.) impacts the interest rates you will be offered. Shorter terms may offer lower rates but require more frequent renewals. Shorter terms may help you save if it’s anticipated that rates may fall in the short term, while longer terms can help shield you from higher rates if they are predicted to rise. 
• Fixed and Variable Rates: Fixed mortgages lock you into an interest rate for your mortgage term, while variable mortgages will have an interest rate that fluctuates with changes to your lender’s prime rate. 
• Amortization Period: Interest rates are typically higher if you choose an amortization that exceeds 25 years. 

Frequently Asked Questions

Final Thoughts 

Opting for a conventional mortgage can benefit those who can afford a 20% or more down payment. It offers savings on insurance premiums and provides higher equity immediately. It’s essential to assess your financial situation and determine if the benefits outweigh the disadvantages of this mortgage solution. 

Consult with our mortgage professionals to determine if a conventional mortgage is the best option for your mortgage needs.