Insured vs. Uninsured Mortgages in Canada: The Essential Differences You Need to Know

Knowing the difference between insured vs. uninsured mortgages can help you make the best financial decision when purchasing a home in Canada.

What are insured mortgages?
What are uninsured mortgages?
Key differences between insured and uninsured mortgages
Interest rate differences for insured vs. uninsured mortgages

What is an insured mortgage in Canada?

An insured mortgages are loans that are protected with mortgage insurance — insurance on mortgage loans can be a requirement by the lender if it is considered a high-ratio mortgage. That is a mortgage where the loan-to-value is 80% or more, which can be thought of as providing a down payment less than 20%. Insurance on mortgage can be provided by CMHC, Genworth and Canada Guaranty. Mortgage insurance helps to protect the lender if the borrower fails to make payments.

Mortgage insurance helps reduce the risk of the lender which allows the lender to offer better interest rates. Through allowing the borrower to provide a smaller down payments, mortgage insurance also helps to make homeownership more accessible to those with smaller down payments, such as first-time homeowners.

What is considered an uninsured mortgage?

An uninsured mortgage is a loan that doesn't require mortgage insurance, typically because the down payment is 20% or more of the home's purchase price. Borrowers with a substantial equity stake are seen as less risky by lenders. Therefore, there's no need for insurance from companies like CMHC, Genworth, or Canada Guaranty to mitigate default risks. These mortgages often come with different terms reflecting their lower risk, making them an attractive option for those with significant savings who want to avoid extra insurance costs.

Insured vs. uninsured mortgage: which is right for you?

The key differences between insured and uninsured mortgages lie in several areas. For insured mortgages, a smaller down payment (usually less than 20% of the home's purchase price) is acceptable, resulting in a higher loan-to-value (LTV) ratio. In contrast, uninsured mortgages require a down payment of 20% or more, leading to a lower LTV ratio.

The interest rates for insured mortgages tend to be lower, as the lender's risk is mitigated by mortgage insurance from entities like CMHC, Genworth, or Canada Guaranty. However, insured mortgages come with additional costs in the form of insurance premiums. Uninsured mortgages, lacking this insurance, often have slightly higher interest rates but do not incur insurance premium costs, reflecting the lower risk associated with higher equity stakes from borrowers.

Interest rate difference between insured and uninsured mortgages in Canada

Insured mortgages in Canada typically come with lower interest rates due to the reduced risk for lenders, as the mortgage is backed by insurance from entities like CMHC, Genworth, or Canada Guaranty. This insurance protects lenders against default, allowing them to offer more competitive rates. In contrast, uninsured mortgages, where borrowers make a down payment of 20% or more, generally have higher interest rates.

Since these mortgages lack insurance coverage, the lenders assume greater risk, which is reflected in the slightly higher rates. Despite this, uninsured mortgages avoid the additional insurance premiums, balancing the overall cost differences between the two options.

What percentage of mortgages are insured in Canada?