Larger Down Payments Sometimes Mean Higher Mortgage Rates

It would seem logical that putting down a large down payment on a property would be a smart move. As it turns out, a smaller down payment may actually save you money in the long run. Because of government mortgage default rules on insurance, it is not as much of a risk for lending institutions to front a loan to someone with a five percent down as it is to a borrower with a heftier 20 percent down payment.

It turns out that 20 percent is the magic number. Borrowers in Canada not putting down at least that amount are required to purchase default insurance on their mortgage if they are dealing with a traditional bank that is federally regulated. The cost for this insurance can run as much as 2.75 percent of the amount of money borrowed on a typical 25-year amortized loan. The loan is guaranteed by the Canada Mortgage and Housing Corporation, a Crown corporation. Another words, the federal government is backing that loan.

Secondary lenders, notes Canadian Mortgage Trends’ Rob McLister, are offering lending rates that are as much as 10 to 15 points higher to uninsured consumers looking for a closed end five year mortgage. This type of thing could escalate if Finance Minister Jim Flaherty takes the CMHC out of the picture. He has already put the agency into the domain of the Office of the Superintendent of Financial Institutions, Canada’s banking regulator.

Flaherty also laid out new rules for portfolio insurance. Up to now the banks have been covering the premium on such policies, made on loans with down payments of more than 20 percent. The banks thought it was easier to monitor the portfolios. Flaherty is no longer allowing this practice, which may result in an increase of rates.

For now the Big Six of Canada’s banks are keeping their pricing pretty consistent. There is just too much competition to do otherwise. Banks also do not want to drive away customers, especially if they could offer other opportunities like lines of credit or credit card services.

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