Critical Changes to Insured Mortgages & Their Benefits

On September 16th 2024, the Canadian government made two massive updates to their insured mortgage guidelines. These changes will have a meaninful impact for first time and move up buyers. The newly announced rules now allow for any buyer to purchase a principal residence for up to $1.5 Million with a less than 20% down payment (previously $1 Million). In addition, first time homebuyers who purchase a property with less than 20% down will now be able to amortize their loans over 30 years (previously 25) which in turn will reduce their monthly mortgage paymens. These two changes will make purchasing a home significantly more achievable for many by requiring them to save less up front and by lowering their monthly mortgage payments.

In this blog we will explain the insured mortgage process in detail including the qualification criteria, costs, benefits and financial examples.

What Is an Insured Mortgage?

When a buyer uses less than 20% for the downpayment of a property purchase, they must purchase "mortgage default insurance" for their mortgage loan. The cost of the insurance is based on the size of the loan and is added to the total mortgage amount and paid off through monthly mortgage payments.

Insured mortgages were previously only available for properties that were purchased for under $1 Million but are now available for purchases up to $1.5 Million. The downpayment requirements depend on the purchase price of the home. The minimum down payment is 5% of the first $500,000 of the purchase price and 10% on the remainder.  For example a property purchased for $1 Million would require a downpayment of $75,000. ($500k x 5%  =  $25k + $500K x 10% = $50k)

Insured mortgages are available through all of the same lenders as a conventional mortgage and come with a number of advantages.

Advantages of an Insured Mortgage

1. Less Capital/Savings Required

The number one barrier for buyers looking to enter or move up in the market is access to capital for a downpayment. Many buyers have the required income to obtain a mortgage, but lack the savings for the downpayment. The time required to save for a downpayment has become more and more challenging and has caused many people to give up on their home ownership goals. While insured mortgages have been available to buyers for years, the previous $1 Million purchase price limit was not aligned with current market pricing, and as a result was useless for most buyers. Under the new rules, a $1.5 Million property would require a $125,000 downpayment compared to $300,000 previously.

2. Access to Lower Interest Rates

Insured mortgages carry less risk for lenders since they are backed and guaranteed by default insurance. This lower risk allows the banks to provide lower mortgage rates to borrowers. Generally speaking, insured mortgages are .5% lower than the equivilant conventional loan.  For example, if a 5-year fixed rate for a conventional mortgage is 4.79%, the 5-year fixed rate for an insured mortgage would be 4.29%. 

3. Easier Approval for First-Time Buyers

First-time homebuyers, especially those with limited credit history or lower income, may find it easier to get approved for an insured mortgage. The insurance mitigates the lender's risk, which means you can qualify even with a smaller down payment. This opens the door to homeownership for those who might otherwise struggle to enter the market.

4. Faster Market Entry

Saving for a 20% down payment on a $1.5 Million property takes most people a number of years. For many, this creates a scenario where by the time they have the savings needed for a downpayment, property prices have grown beyond their reach. Entering the market as soon as possible is the only way to ensure that you aren't priced out of it.

Entering the market also allows property owners to begin building equity through mortgage payments and increases in property values. Over the past 10 - 15 years, waiting to purchase a property in order to increase savings for a downpayment has been a costly strategy.

Insured mortgages allow buyers to enter the market faster, and the updated guidelines now make them valuable and accessible for a huge segment of the buyer market.

Purchase Example for $1.5 Million Property

Under the previous rules, purchasing a $1,500,000 property would require a $300,000 (20%) down payment, and buyers would only have access to conventional mortgage rates. For context sake, as of the writing of this blog, that would equate to approximately 4.8% for a 5 year fixed mortgage.

Under the new rules, the down payment required for the same purchase would be $125,000 and the mortgage rate would be 4.3% for a 5 year fixed mortgage.

Conventional Purchase - $345,000 Cash Needed