Do I need mortgage insurance? Understanding the difference between insured and conventional mortgages

Banafshe Salehi September 19, 2024

When it comes to mortgages, there are plenty of burning questions to answer – especially for first time homebuyers. Some of them can even feel embarrassingly rudimentary. When is mortgage insurance required? What do I need to qualify? What happens if I decide to pack up and move? What even is mortgage insurance, technically? But when it comes to buying your first home, no question should go unanswered. When I started looking into mortgages, I realized that understanding my options was like finding the cheat codes to the homebuying game. It was a total game-changer if you will. And even though I’m not quite close to achieving that dream yet, getting my information straight has been key to preparing. So grab a cup of joe, settle in, and let’s get real about mortgage insurance.

When I started looking into mortgages, I realized that understanding my options was like finding the cheat codes to the homebuying game.

The basics on insured and conventional mortgages

An insured mortgage is protected by mortgage insurance. This insurance isn’t for you, though—it’s for the lender. If you default on your mortgage, the insurance kicks in to cover the lender’s losses. On the flip side, a conventional mortgage isn’t insured. Here’s what you need to know about each kind of mortgage.

Insured mortgages

This type of mortgage is required when your down payment is less than 20% of the home’s purchase price. This is because lenders see these loans as riskier. “A non-conventional mortgage helps you to get into the market. If it takes you a long time to get to a 20% down payment, you can qualify for an insured mortgage instead,” says Gagan Kang, Mortgage Development Manager at Vancity Credit Union.

What’s needed to qualify? Generally, you need a decent credit score, proof of steady income, and the ability to make regular payments. The exact requirements can differ based on the insurer’s guidelines.
Where does it come from? Insured mortgages currently come from three mortgage insurers in Canada — the Canadian Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. Your lender can pick any of these mortgage providers to arrange for the purchase of your mortgage insurance.
Who pays the premiums? Spoiler alert: You do. The cost of mortgage insurance premiums is typically added to your monthly mortgage payment, although some lenders might allow you to pay it upfront.

Starting December 15, 2024, the CMHC-insured mortgage cap will increase from $1 million to $1.5 million; and first time homebuyers or those purchasing new builds can qualify for 30-year amortizations. This change will make it possible for first time homebuyers to access insured mortgages for higher-priced homes.

“A non-conventional mortgage helps you to get into the market. If it takes you a long time to get to a 20% down payment, you can qualify for an insured mortgage instead,” says Gagan Kang, Mortgage Development Manager at Vancity Credit Union.

What happens if you move? If you sell your home or refinance your mortgage, the mortgage insurance usually ends. However, you don’t get a refund on any premiums you’ve already paid.

Conventional mortgages

Conventional mortgages are standard loans without the backing of insurance. However, if your down payment is less than 20%, lenders might require private mortgage insurance (PMI), which is similar to the insurance for insured mortgages.

What’s needed to qualify? Generally, conventional mortgages have stricter qualification requirements than insured ones. You’ll need a higher credit score and a solid financial history.
Where does it come from? These loans are offered by private lenders like banks, credit unions, and mortgage companies. Additionally, insured mortgage holders can switch lenders at renewal without requalifying, making it easier to find better rates.
Who pays the premiums? If you need PMI because your down payment is less than 20%, you pay the premiums. If your down payment is 20% or more, no insurance is required.

What happens if you move? If you sell or refinance, any PMI you were paying typically stops, but again, don’t expect a refund for premiums already paid.

Which mortgage type is right for you?

There are, of course, pros and cons with each type of mortgage, and this is where you’ll see the real differences that might influence your decision. For me, understanding these differences made clear what might be possible with my budget.

Insured mortgages

Pros:

Lower down payment: You can get into a home with a down payment as low as 5%. This makes homeownership more accessible, especially for first time buyers.
Easier qualification: Since the lender’s risk is reduced by the insurance, they might be more lenient with credit score requirements and other qualifications.
Potentially lower interest rates: Because the lender’s risk is lower, you might score a lower interest rate compared to a conventional loan with the same down payment.

Cons:

Insurance premiums: You’re on the hook for mortgage insurance premiums, which can add a chunk to your monthly payment.
Stricter property standards: Insured loans require that the home you’re buying meets certain criteria, which can limit your options.
Longer approval process: Extra steps involved in securing the insurance mean a time-consuming approval process.

Shorter payoff period: The maximum time to pay off your mortgage is 25 years as opposed to 30 years with a conventional mortgage.

There are, of course, pros and cons with each type of mortgage, and this is where you’ll see the real differences that might influence your decision. For me, understanding these differences made clear what might be possible with my budget.

Conventional mortgages

Pros:

No insurance with 20% down: If you can swing a 20% down payment, you won’t need to worry about mortgage insurance at all. That’s one less expense to think about.
More flexible property options: Conventional loans don’t usually come with the same strict property requirements as insured loans, giving you more freedom in choosing a home.
Potentially faster approval: With fewer hoops to jump through, the approval process can be quicker for conventional loans. If you’re looking to make quick moves in a fast-changing market, a conventional mortgage can work in your favour.
Longer payoff period: The maximum time to pay off your mortgage is 30 years.

Cons:

Higher down payment: Saving up a 20% down payment can be a major hurdle, especially for first time buyers. With a smaller down payment, you’ll still need PMI.
Stricter qualification criteria: Conventional loans often require a higher credit score and more rigorous financial documentation, which can be a barrier for some buyers.

Higher interest rates: If your down payment is less than 20%, you might face higher interest rates compared to insured loans.

Making an informed decision

All of this is a lot to consider. But if the choice isn’t obvious, then how exactly do you decide between an insured mortgage and a conventional one? Here are a few scenarios to think about.

Scenario 1: First Time homebuyer with limited savings

If you’re a first time homebuyer and have a limited down payment, an insured mortgage is a great mortgage option to consider. The lower down payment requirement makes it easier to get into a home, and the easier qualification criteria can be a lifesaver if your credit history isn’t perfect.

Scenario 2: Buyer with strong financials

If you’ve got a solid credit score and enough savings to make a 20% down payment, a conventional mortgage is likely the way to go. You’ll avoid the extra cost of mortgage insurance and might benefit from a quicker, smoother approval process.

Scenario 3: Homebuyer in a competitive market

In a hot real estate market, having more flexible property options can give you an edge. Conventional mortgages typically don’t have the same stringent property standards as insured loans, allowing you to consider a wider range of homes. “This is still the buyer’s market,” says Kang. “Markets are stabilizing and it’s a good time to get into the market and take advantage of the decreasing interest rates. A non-conventional mortgage can help you do that.”

Scenario 4: Refinancing your mortgage

If you’re looking to refinance, the choice between insured and conventional might depend on your current financial situation and home equity. Refinancing with a conventional loan could save you on insurance premiums if you’ve built up enough equity.

These scenarios should give you a ballpark of what you can aim for. There are also options like a blended mortgage or extending your amortization if need be.

Choosing the best mortgage is personal

At the end of the day, the choice between an insured mortgage and a conventional one boils down to your personal financial situation, your homebuying goals, and your tolerance for risk. Both options have their pros and cons, and what’s right for one person might not be right for another.

Remember, mortgages are a big deal—literally and figuratively. But with the right information, you can navigate the process with confidence. So take the time to weigh your options carefully, so you can make the choice that’s best for you.

And hey, if you need more guidance on your choice or on managing your mortgage down the line, don’t hesitate to reach out to a friendly mortgage expert. They’re there to help you every step of the way. For personalized mortgage advice, book an appointment with a Vancity Mortgage Specialist