This article has been updated from a previous version.
Not every mortgage is the same. There are fixed rate mortgages and variable rate mortgages, of course, which refer to the interest you’ll have to pay throughout your loan term.
But then there are also conventional and high-ratio mortgages — these terms decide whether a buyer needs to pay insurance on their mortgage.
Conventional mortgages in Canada
A conventional mortgage is an uninsured residential mortgage. Home buyers who pay a 20% down payment on their homes thus would only need a loan for the remaining 80% of the total purchase price of the home. This exempts the buyer from having to purchase mortgage insurance.
With a conventional mortgage down payment, if the price of the home is $500,000, you would need to put down a $100,000 payment in order to bypass having to pay insurance on that loan.
The big benefit of a conventional mortgage loan is that it offers immediate equity on a new home. Plus, financial institutions would consider conventional mortgage-holders less risky to lend to and be willing to offer more loans like a home equity line of credit (HELOC) because of the existing equity in the home.
The difference between a HELOC and a conventional mortgage, however, is that a HELOC is secured against a home’s equity. Homeowners can use it on an ongoing basis as needed — sort of like a revolving line of credit. They have to pay only the minimum interest payment, unlike a mortgage where you have a set weekly, biweekly or monthly payment. There are risks that come with HELOCs, though. Interest rates associated with HELOCs tend to be high and a lender can ask for the entire loan amount to be paid back at any time, even if it has not been used it at all.
Conventional vs. high-ratio mortgage
The opposite of a conventional mortgage is a high-ratio mortgage — where the down payment is less than 20%. These mortgages require insurance from a mortgage insurance company. Canada’s three major ones are the Canada Mortgage Housing Corporation (CMHC), Sagen Insurance Mortgage Company or Canada Guaranty. The insurance on a high-ratio mortgage can range from 0.6% to 4% of your loan amount, depending on the down payment and home price.
With insured mortgages, lenders are protected in the event of a mortgage default. The insurance premiums are added to the overall mortgage amount, bumping up a buyer’s monthly balance (or whatever payment schedule they have opted for). Once 20% of your mortgage has been paid off, the insurance can be cancelled.
It's worth mentioning that most homes require a minimum down payment. Homes priced over $1 million require a 20% down payment, so these buyers are automatically exempt from having to pay mortgage insurance.
Collateral vs. conventional mortgage
Conventional mortgages are often mentioned at the same time as collateral mortgages (like now, for example) but they do have some differences. With a collateral mortgage, a mortgage is “re-advanceable,” which means that as the value of the home increases, your lender can loan you more money without you needing to refinance your mortgage.
Instead, they will register your property for a collateral change for a higher amount than the original loan. You can then borrow the money as you need, similar to a HELOC.
Interest rates on conventional mortgages
There’s no set or specific interest rate for conventional mortgages.
The interest rate attached to conventional mortgage financing depends on several factors, including:
- the buyer’s credit history
- the length of the mortgage term
- the amortization period
- the current prime rate
- whether the mortgage is on a fixed or variable rate, and
- the overall loan amount.
So, while having a 20% down payment is helpful, there’s no guarantee that this alone will net the best rate on a conventional mortgage loan. That said, a buyer with a larger down payment is likelier to be considered lower risk and may be offered preferential or special interest rates.
Cover your bases
Be prepared for lenders to do their due diligence on you when applying for a conventional mortgage. Your credit score will be an important component here, so try and make sure it’s in good shape before trying to qualify. You should also work with a mortgage broker and compare mortgage rates online to be sure you’re getting the best conventional mortgage rate for your needs.
Another benefit of a conventional mortgage is that the mortgage type remains the same over time. So, when it’s time to renew or refinance a conventional mortgage, switching to another provider won’t alter an existing mortgage’s status.
Lenders with the best conventional mortgage rates
No matter the lender, you’ll be subject to the mortgage stress test, which decides whether a buyer can afford a home.
As of June 2021, the Office of the Superintendent of Financial Institutions (OSFI) introduced new changes to the mortgage stress test. Previously, only those seeking high-ratio mortgages had to undergo the test, but now every homebuyer is subject to it — whether they meet the requirements for a conventional mortgage or not.
The OSFI wants these borrowers to prove that they can afford the interest rate they’re given today for a conventional mortgage at 5.25% or the rate offered by the mortgage lender plus 2% — whichever happens to be higher.
While there are benefits to going with a conventional mortgage (immediate equity, lower monthly payments, and the ability to access more loans if needed), be sure that you’re not leaving money on the table by simply taking the first offer from the first lender you speak with. Shopping the market is one of the most advantageous things you can do when looking for any financial product, especially something as big as a mortgage.
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About the author
Renee Sylvestre-Williams is a finance and business reporter. In her more than 10 years of journalism, her work has been published in the Globe and Mail, Flare, Canadian Living, Canadian Business, the Toronto Star and Forbes. She also publishes a biweekly newsletter, The Budgette, where she provides financial education for single earners.