Lopsided Mortgage Rate Specials

Mortgage Spin Doctors at Work

It’s counter intuitive, but a large downpayment on your house purchase might mean you’ll have to settle for a higher mortgage rate.  The concept isn’t new, but recent regulatory changes have made this proposition a reality in the mortgage market.

Traditional thinking is that the greater the downpayment, the safer the mortgage, and the safer the mortgage the lower the mortgage rate.  The reason this isn’t the case is because CMHC or Genworth mortgage insurance is required on low downpayment mortgages.  The mortgage insurance insures the lender against default with the backing of the Canadian government.  An insured mortgage, therefore, provides the lowest risk to a mortgage lender.

In previous years mortgage lenders would insure all their mortgages behind the scenes by purchasing bulk insurance from CMHC.  Although there was a cost to bulk insurance, it made the mortgages extremely safe assets that could be sold to the capital markets at a very low mortgage rate.  Mortgage lenders still sell their mortgages to the capital markets, but the uninsured ones now carry a higher risk premium resulting in a higher mortgage rate.

The end result is that borrowers with less than 20% downpayment will find mortgage rate specials between 0.15% and 0.35% lower than mortgage rates available to borrowers with downpayments of 20% or more.

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