In the world of Canadian real estate, any mortgage obtained with less than a 20% down payment requires the additional purchase of mortgage insurance. Mortgage insurance protects lenders in the event that the borrower defaults on their mortgage loan. These mortgages are very common, as a 20% down payment toward the purchase of a home is often out of reach for many Canadians. But when this 20% benchmark can be met or exceeded by the buyer, this is called a conventional loan.
Conventional mortgage loans are issued when a borrower gives the lender 20% or more of the home’s total value as their down payment. This dismisses the need for mortgage default insurance, decreases the amount spent on the mortgage principal, and reduces the cost of interest on the loan.
In a conventional mortgage, the 20% down payment means that the lender is only issuing 80% of the total value of the home. If the borrower has a 35% down payment, the lender issues only 65% of the home’s total value under the terms of the mortgage.
When a borrower cannot give the full 20% to accommodate a conventional mortgage and the lender issues a mortgage greater than 80% of the home’s value, this is called a high-ratio mortgage.
Why You Should Want a Conventional Mortgage
A 20% down payment is a lot of money to drop all at once toward any endeavor, but doing so now can save you some serious money in the long-run. It can also provide you some pretty handy benefits, like not having the added expense of mortgage default insurance. Lenders consider the 20% down payment “cushion” paid to be enough of an assurance that they do not need to particularly worry about the borrower defaulting on their loan.
That’s right-there is no mortgage insurance necessary when you have a conventional mortgage. The premiums on mortgage insurance take away money that you would otherwise have saved, either in a lump-sum at the beginning of the mortgage term, or spread out through monthly payments.
Paying a higher down payment also reduces the total amount that you will owe a lender. The less that they have to borrow to you, the less your payments and interest will be. Paying with a down payment of 20% or higher is a commonly practiced method of paying off one’s mortgage as quickly as possible for this reason.
You also get to enjoy having some immediate equity on your new home with a heftier down payment. Home equity payments or home equity lines of credit (HELOC) are more readily available when you have already paid 1/5th of the home’s total value.
Paying more at the beginning of your mortgage could save you thousands over its term. Whenever it is possible for you to enter into a conventional mortgage, you should. Even if it means saving for just a little bit longer to get that full 20%, you’ll be glad that you were proactive about your home ownership ambitions.