There are many different types of mortgages available to homeowners, but one of the most common in Toronto is the conventional mortgage.
Conventional mortgages do not carry high-ratio or lender insurance premiums, and they often are tightly controlled by the finance industry due to the Bank Act of Canada. Because of this law, no chartered bank may offer financing without insurance that covers a certain percentage of the property’s value. As of 2007, this amount is 80% for residential single-family mortgages.
Conventional mortgages also differ from what is known as a high-ratio mortgage, which often has rates that can exceed 80% of the property value and will need to be insured through a mortgage insurance company such as Genworth or Northwood Mortgage™.
However, high-ratio mortgages often have the cost of insurance premiums added directly to your mortgage amount, instead of being deducted from a lender fee like a conventional mortgage.
Since conventional mortgages do not exceed 80% of the property’s value, there is a 20% cushion remaining, which means the bank or mortgage institute in question has enough financial insulation to cover themselves from risks and does not need to take out a loan for third-party insurance coverage, unlike a high-ratio mortgage.
Now, let’s quickly discuss down payments. Say, for example, that you want to purchase a $200,000 home. To qualify for a conventional mortgage, you would need to pay a minimum of at least $40,000 as your down payment. If you pay less than this 20% down payment, you would have a high-ratio mortgage as opposed to a conventional mortgage.
Pros and Cons of Conventional Mortgages
Conventional mortgages do come with significant benefits such as allowing homeowners to have more home equity due to larger down payments, as well as the ability to save money, and access to useful tools such as financial advisors.
However, there are also some cons that can be associated with a conventional mortgage. For one, you may still need to pay a high-interest rate for your insurance. This is because lenders often do not earn much from conventional mortgages, and will charge higher interest rates than those for a high-ratio mortgage.
While these rates can occasionally be debatable, depending on the insurer and the terms of your mortgage, we recommend consulting a mortgage consultant to understand the rates available to you and how your equity will affect them.
It’s also important to consider that conventional mortgages are very expensive upfront, requiring you to pay a 20% down payment, which can be difficult for many homeowners. This could cause you to put off the purchase of a prospective home, which might result in losing out on your ideal home or mortgage deal.
Choosing the Right Mortgage Option for Your Home
Of course, conventional mortgages and high-ratio options are only two typical options you can find when attempting to arrange a mortgage for a potential home. They also come in the form of fixed-rate mortgages, variable-rate mortgages, convertible mortgages, bridge mortgages, hybrid mortgages, closed mortgages, and numerous other types.
If you feel you’re a bit lost with all the terminology, or if you’d simply like to consult a professional mortgage agent, then you can contact the experts at Northwood Mortgage. Call us at 888-495-4825 or contact us online. We’ve been offering mortgage solutions to the Toronto area for years and will do what we can to get you your dream home.
