What is a conventional mortgage?
A conventional mortgage is a type of mortgage that is not insured or guaranteed by the government. This means that the borrower is responsible for paying the entire mortgage amount and the lender is taking on all the risk. In Canada, conventional mortgages require a down payment of at least 20% of the home’s purchase price.
Advantages of a conventional mortgage
One of the advantages of a conventional mortgage is that there is no need to pay for mortgage insurance. Mortgage insurance is required for high-ratio mortgages, which are mortgages where the down payment is less than 20% of the home’s purchase price. Mortgage insurance protects the lender in case of default, but it can be expensive for the borrower. By putting down at least 20% on a conventional mortgage, borrowers can avoid the cost of mortgage insurance and save thousands of dollars over the life of the mortgage.
Another advantage of a conventional mortgage is that it allows borrowers to have more control over their mortgage payments. Because the borrower is responsible for the entire mortgage amount, they can choose the term of the mortgage and the type of interest rate that suits their needs. For example, borrowers can choose a fixed-rate mortgage, which has a set interest rate for the entire term of the mortgage. This lets borrowers know exactly what their mortgage payments will be each month, making it easier to budget and plan for the future. Alternatively, borrowers can choose a variable-rate mortgage with an interest rate that fluctuates based on market conditions. Variable-rate mortgages often have lower interest rates than fixed-rate mortgages, which can save borrowers money over the life of the mortgage. Borrowers need to be aware that variable-rate mortgages also carry the risk of rising interest rates, which could increase their mortgage payments.
When applying for a conventional mortgage, borrowers will need to provide documentation that proves their income, assets, and creditworthiness. Lenders typically require a credit check, proof of employment or income, and proof of down payment. Borrowers with a high credit score and a stable income are more likely to be approved for a conventional mortgage and get the best rates.
Risks of a conventional mortgage
It’s also important to note that conventional mortgages come with certain risks. Because the borrower is responsible for the entire mortgage amount, they could lose their home if they are unable to make their mortgage payments. This is why it’s important for borrowers to choose a mortgage that fits their budget and financial situation.
Conventional mortgages are a popular choice for homebuyers in Canada who have saved up a significant down payment. By putting down at least 20%, borrowers can avoid the cost of mortgage insurance and have more control over their mortgage payments. Borrowers should carefully consider their financial situation and choose a mortgage that fits their budget and risk tolerance.
Conventional mortgages can also be defined as insurable or non-insurable depending on debt service ratios. Insurable conventional mortgages will get a better rate and have a wider choice of available lenders than non-insurable ones. Insurable mortgages are ones that meet the same criteria as high ratio mortgages – stress tested 39 GDS 44TDS and a maximum 25-year amortization. For more information on conventional mortgages, contact a mortgage broker.