Canadian homebuyers can easily be confused by the number of different options and types of mortgages. In particular, in the banking industry, there are mortgages that are called conventional mortgages, which are different from high-ratio mortgages. What type of mortgage is best for you and which one you qualify for depends on your down payment and how much you are going to borrow to buy your home. Because of the variety of options, it is important to talk to a mortgage agent who can help you decide the best loan for you.
A Conventional Mortgage
Homebuyers who are paying 20 percent or more for a down payment can get what is called a conventional mortgage. In this situation, you are borrowing less than 80 percent to buy the home. These mortgages don’t require any extra insurance because they are not seen as higher risk mortgages.
However, if you need to borrow more than 80 percent to buy the home and cannot put 20 percent of the house value as a down payment, then you won’t be able to get a conventional mortgage in Toronto. Instead, you would get a high-ratio mortgage. In this case, you’ll also need to have insurance for the loan, which is added protection for the lender. These premiums will be added on top of your monthly mortgage payments.
Benefits of a Conventional Mortgage
One of the biggest advantages of having a conventional mortgage is that you won’t have to pay insurance premiums. The insurance offers protection for the lender against home buyers defaulting on their mortgage payments. These premiums are based on standards set out by the Canadian Mortgage and Housing Corporation (CMHC). They vary depending on what percentage of a down payment you can place when buying your home. Most homebuyers who do not qualify for a conventional mortgage will pay thousands of dollars to the CMHC for insurance on their mortgages.
Another benefit of a conventional mortgage is that you’ll have a significant amount of equity in the home right from the start. That means if you need to access your home equity for any reason, then you’ll be able to get more. Banks will look favourably on you because you have a lot of equity in your home, which can come in handy when you need to make financial arrangements such as applying for a Home Equity Line of Credit.
Drawbacks to a Conventional Mortgage
While it may seem that a conventional mortgage is a great idea for homebuyers, there are some drawbacks. These include:
- Without the added protection of insurance against risk, lenders may charge higher interest rates on conventional mortgages.
- Saving 20 percent for a house purchase can take a long time. During this period, you’ll likely be paying rental costs that compare to mortgage costs, but without the benefits of homeownership.
Finding the right mortgage for you can be a challenge, which is why it is best to talk to a mortgage professional for advice.
If you are interested in learning more about your mortgage options, call Northwood Mortgage™ at 888-492-3690 or contact us here.