Behind the Scenes of Your Mortgage: How It Is Insured, Funded and Priced
Insured, insurable or uninsured, how monoline lenders fund your mortgage, and why it all matters for your rate and your penalty.
The quick version
Every mortgage falls into one of three groups: insured, insurable or uninsured.
Insured means less than 20% down, and you pay for default insurance. Insurable means 20% or more down, but the lender can still insure it and pays for it. Uninsured covers refinances, rentals and homes priced at $1.5 million or more.
A monoline lender does one thing: mortgages. You get a monoline mortgage through a mortgage broker.
Monoline lenders get their money from large investors, not savings accounts.
Insured and insurable mortgages can be pooled into a government-backed investment, which is a big reason they get sharp pricing.
Monoline penalties for breaking a fixed mortgage are often much lower than a big bank's.
Not sure where your mortgage fits? Book a call and I will tell you in a few minutes.
Part one: the three types of mortgages
Lenders price every mortgage based on risk. When a mortgage is covered by default insurance, the lender is protected if a borrower stops paying. Less risk for the lender usually means better pricing for you. In Canada, mortgage default insurance comes from three insurers: CMHC, Sagen and Canada Guaranty.
1. Insured mortgages (less than 20% down)
Your mortgage is insured when you put down less than 20% of the purchase price. Default insurance is required by law, and you pay the premium.
Minimum down payment: 5% of the first $500,000, plus 10% of any amount from $500,000 up to $1.5 million.
Purchase price: must be under $1.5 million.
The home: you must live in it. Homes with up to four units qualify when you live in one of them.
Amortization: up to 25 years. First-time buyers and buyers of a newly built home can choose up to 30 years.
The premium: 2.8% to 4% of your mortgage amount, depending on your down payment. It is added to your mortgage, so you do not pay it up front.
Saskatchewan tip: provincial sales tax (PST) applies to the premium, and it must be paid in cash at closing. Budget for it.
Pricing: insured mortgages often get the best rates on the market.
2. Insurable mortgages (20% or more down)
This is the one most people have never heard of. With an insurable mortgage, you put down 20% or more, but your mortgage still fits inside the insurance rules. The lender can insure it behind the scenes and pays the premium itself. You pay nothing for the insurance. To be insurable, your mortgage must:
Be for a purchase, or a switch of an existing insurable mortgage to a new lender at renewal with no new money added.
Have a purchase price under $1.5 million.
Have an amortization of 25 years or less.
Be for a home you live in.
Meet the insurers' qualifying rules, including the stress test.
Pricing: insurable rates are usually very close to insured rates, and often better than uninsured rates.
Good to know: with 20% down, choosing a 30-year amortization instead of 25 years moves your mortgage from insurable to uninsured. A slightly lower payment may come with a higher rate. I will run both options so you can see the real difference.
3. Uninsured mortgages (20% or more down)
An uninsured mortgage, often called a conventional mortgage, has 20% or more down and does not fit the insurance rules. There is no insurance, so the lender carries all of the risk. Your mortgage is uninsured when:
The purchase price is $1.5 million or more.
You are refinancing, for example to consolidate debt or take equity out of your home.
You are buying a rental property you will not live in.
You choose an amortization longer than 25 years with 20% or more down.
Pricing: uninsured mortgages often have slightly higher rates, but they give you the most flexibility.
At a glance
Down payment: Insured, less than 20%. Insurable, 20% or more. Uninsured, 20% or more.
Purchase price: Insured and insurable, under $1.5 million. Uninsured, any price.
Longest amortization: Insured, 25 years (30 for first-time buyers and new builds). Insurable, 25 years. Uninsured, up to 30 years with most lenders.
Who pays for insurance: Insured, you do. Insurable, the lender does. Uninsured, there is no insurance.
Refinances and rentals you do not live in: uninsured only.
Pricing: insured and insurable are often the lowest. Uninsured is often slightly higher.
Part two: how your mortgage is funded
Now that you know the three types, here is who lends the money and where it comes from.
4. Who lends the money: monoline lenders
A monoline lender focuses on one thing only: mortgages.
No chequing accounts, credit cards or car loans.
No branch on every street corner.
You get your mortgage through a licensed mortgage broker, like me.
Lower costs mean they can often offer sharper rates and fairer penalties.
After your mortgage funds: Monoline lenders have excellent online portals and exceptional customer service, so you can check your mortgage and get answers directly. And you can always reach out to me with any questions or concerns about your mortgage. I am here long after your mortgage funds.
5. Where the money comes from
A bank lends out money from its chequing and savings accounts. A monoline lender does not take deposits, so it gets its money from investors instead. This is called securitization. Here is how it works:
Step 1: You apply. I help you choose the right lender and send in your application. The lender reviews and approves it.
Step 2: Your mortgage funds. The money is sent on closing day and you get your keys.
Step 3: Mortgages are pooled. The lender groups your mortgage with many other Canadian mortgages.
Step 4: Investors buy in. Pension funds, insurance companies and other large investors buy into the pool.
Step 5: The money is recycled. The investors' money goes back to the lender, who uses it to fund the next homebuyer.
Here is where it all connects: insured and insurable mortgages can be pooled into a government-backed investment called a Mortgage-Backed Security (MBS), where CMHC guarantees investors are paid on time. That is why a lender is willing to pay the insurance on an insurable mortgage, and why insured and insurable mortgages often get the best pricing. Uninsured mortgages are funded through other investor programs.
Good to know: nothing about your mortgage changes when this happens. Your rate, your terms and your payments stay exactly the same.
6. The big advantage: fairer penalties
Life happens. Many Canadians break their fixed mortgage before the term is up because they move, refinance or go through a big change. That is when the penalty matters.
Big banks: Many use their higher "posted rates" to calculate the Interest Rate Differential (IRD) penalty. That can push the penalty into the thousands, and sometimes into the tens of thousands of dollars.
Monoline lenders: Most calculate the penalty using the actual rate you received. In the same situation, the penalty is often a fraction of what a bank would charge.
Is a monoline lender right for everyone?
Not always. Some monoline lenders offer fewer extras, like a home equity line of credit, or having your banking all in one place. I will walk you through the trade-offs so you can choose what fits your life.
Small changes, big difference
19% down or 20% down: at 20%, there is no insurance premium for you to pay.
25 years or 30 years: with 20% down, 25 years keeps your mortgage insurable, and often better priced.
Just under or just over $1.5 million: the price decides whether insurance is even an option.
Bank or monoline: the lender you choose can change your penalty if life changes.
The bottom line
Your down payment, your amortization and the lender you choose all work together behind the scenes. My job is to look at your goals and your budget, then find the mortgage that makes the most sense for you, not just the lowest payment today.
Let us map out your best option
Buying, renewing or refinancing? I work with Canada's top monoline lenders, as well as banks and credit unions. Book a call and let us build a plan that matches your goals.
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