Are you looking at mortgage options before you buy your first or next home? From mortgage broker, Katherine Martin comes help.
Before I explain the difference between insured, insurable and uninsurable mortgages it’s important to know how these mortgages came about.
Borrowers are required to pay mortgage default insurance when they have less than 20% for a down payment. What you may not know is that lenders are able to pay for mortgage default insurance even though the insurance isn’t required. Borrowers would not know that their mortgage is insured, rather the lender would pay for, and insure the mortgage on the back end. These mortgages are often bundled into sellable assets, a process called securitization.
Investors, like large pension funds, are very keen on purchasing these assets because it allows them to purchase many lower risk mortgages (lower risk because they are insured) at once, knowing there will be a specific return. Because the risk is lower, the investors may be willing to see a lower return, providing lenders with a lot of inexpensive money to lend out. This process, is widely used by lenders, and in turn provides for better interest rates for borrowers.
The result of securitization was the emergence and major growth of mortgage finance companies, called wholesale lenders or monoline lenders. In fact, the majority of wholesale lender mortgages are back-end insured by the lender, packaged up, and sold to investors.
What is interesting here is that monoline or wholesale lenders don’t only insure the mortgages they originate (ex. on a purchase), but they can also insure mortgages transferred from one institution to another – something banks do not do. This allows for better interest rates when renewing with a wholesale lender than if renewing with your current bank lender.
Examples of wholesale lenders are: First National Financial, MCAP, Street Capital, RMG Mortgages.
To recap, any mortgage that is inexpensive for a wholesale lender to get financing for, allows the lender to pass on savings to their clients…meaning mortgages that are insured get the best rates!
An insured mortgage is where a borrower is required to pay the mortgage default insurance because they have less than 20% down payment.
But, lenders can also pay for insurance for their client! An “insurable” mortgage is one where the clients puts 20% down (or more), and their mortgage is approved as though a client is paying for insurance, but the actual insurance is paid for by the lender.
Rates for insurable mortgages are generally very similar to insured mortgages. An “uninsurable” mortgage is one where mortgage insurance is not available.
The table below outlines what type of mortgages are insured, insurable or uninsurable.
So what does all of this mean for borrowers…every day people like you and I?
If your mortgage is insurable, you may be able to get the best rates. What is interesting to note is that if you have a mortgage that was previously uninsured, your current lender cannot insure your mortgage but your mortgage may be insurable if you transfer to a new lender – this is where our opportunity lies!
As an aside, if your mortgage was previously insured, and you paid for mortgage insurance, you will also be offered the best rates upon transfer or renewal.
For those that are eligible, they may have opportunities to save thousands of dollars on their current or future mortgage by taking advantage of the best “insurable” rates.
If you have any questions, please do not hesitate to contact me.