Simply put Conventional Mortgages require a 20% or more total cash deposit on a home purchase, whereas an unconventional mortgage (also known as high-ratio or an insured mortgage) require = or > 5% to 19.99%. Which one is right for you or required for you to chose is based on your income, employment status, credit rating, debt-service ratios and whether or not you already own a home. The math can be quite complicated.
Your decision may not be as easy as “Well Pete, I have $100K in the bank after I sell my existing home, so that means I can go out and buy a $500K home right?”. Or, “I want to buy my first condo and I have saved up $20K, that means I am eligible to buy a $400K home?”. Depending on all of the variables described above, the bank may require more of a total deposit or they may charge higher interest rates for certain types of products. This is why it is critical that you discuss your complete financial position with your mortgage broker to determine the best strategy and product BEFORE you go shopping.
Here are some other things to consider:
- Conventional Mortgages do not require a government backed mortgage insurance premium to paid but they do require that the property being purchased to be independently appraised (you pay) and they often charge slightly higher interest rates (to mitigate their risk of no mortgage insurance). This means that if the appraised value is less than what you have agreed to pay on the offer to purchase, you would have to pay the difference in cash, convince the seller to drop their price or walk-away.
- All High-Ratio, Unconventional mortgages require that you pay an insurance premium to a third party to protect the lender in case you default. Those premiums are less with more of a cash deposit down and more information on those calculations can be found at CMHC or Genworth. The property being purchased (typically) does not need to have it’s value verified by an independent appraiser and interest rates are usually slightly lower.
- For properties up to $500K a borrower is only required to put 5% deposit down. For every dollar over $500K, the deposit must be 10%. For example: If you wanted to put the minimum down payment on a $700K purchase, the deposit would be 5% of $500K and 10% of the remaining $200K for a total of $70K ($50K + $20K).
- There is no difference between condos or properties that are not a condo. However, 50% of the condo fees will be added to your debt service ratio thereby reducing your total purchasing power equal to that amount on a monthly basis (exceptions are made for condos where all of the utilities are paid by the condo corporation).
- There are multiple types of lenders for almost every type of buyer.
- DO NOT FOCUS ON THE “BEST RATE MORTGAGE”. In my experience, this is a complete bait-and-switch scam. If it’s an ultra-low rate, chances are the lender will require you to take an expensive life insurance policy on the mortgage or charge prohibitive fees for origination or renewal. There is a reason they make billions of net profit.
- Consider taking a variable mortgage (lower rate) and banking the rest. Talk to your mortgage broker about what is the best option for your risk tolerance and see if you can pay yourself the fixed rate premium instead of handing it over to the banks.