Conventional Mortgage In Canada: Everything You Need To Know

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Overview Of A Conventional Mortgage In Canada

Buying a house is a tedious ordeal. It’s not only the search that matters but a variety of other aspects that require extensive research and planning.

An essential first step is determining your available mortgage options, weighing them, and planning. The extent of your in-hand finances makes a big difference in making the right mortgage decisions.

What Is A Conventional Mortgage In Canada?

A conventional mortgage is where the loan’s value is no more than 80% of your property’s value. The property value can be appraised, purchased, or market value.

The metric used to determine this type of loan is the Loan To Value (LTV) ratio. Therefore, we can say that conventional mortgages are mortgages with a loan-to-value ratio of 80% or less.

Assuming you are buying a $450,000 home and putting down $95,000, you will be subscribing to a conventional mortgage because the LTV of the loan would be less than 80% (precisely 78.9%).

When refinancing, you must have a minimum of 20% equity in your property. These equity restrictions make refinancing a mortgage a conventional mortgage solution.

You need to get default mortgage insurance with a conventional mortgage, significantly saving you on mortgage costs.

A mortgage lender still may require default insurance for a conventional mortgage, but the lender often will cover the default insurance cost.

Conventional Mortgage Vs. High-Ratio Mortgage

With a high-ratio mortgage, you will have to qualify with the lender and a specific default insurance provider. This sometimes can be challenging. The lender may approve your mortgage request, but the insurance provider could decline your insurance coverage, ultimately declining your mortgage application.

This is not the case with conventional mortgages. The lender’s approval criteria only assess you. Conventional mortgages come in different flavours.

On the other end of the spectrum are high-ratio mortgages. These are mortgage loans where the mortgage loan value is more than 80% of the property value. A high-ratio mortgage must be insured with one of the default insurance providers (CMHC, Sangen, and Canada Guaranty).

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Benefits of Conventional Mortgages

Lower Interest Expense:

Compared to a high-ratio mortgage, your high equity or down payment on the property will reduce the amount of mortgage loan you need.

The lower loan amount will reduce the overall interest expense you will pay for the mortgage loan, everything being equal.

	Conventional	High-Ratio
Property Value	$500,000	$500,000
Equity OR Down Payment Value	$100,000	$25,000
Loan To Value Ratio	80%	95%
Mortgage Default Insurance Premium	$0	$19,000.00
Mortgage Default Insurance Premium Rate	$0	4%
Final Mortgage Loan	$400,000.00	$494,000.00
Interest Rate	2.49%	2.49%
Mortgage Term	5 Years Fixed Rate	5 Years Fixed rate
Amortization	25 Years	25 Years

Monthly Payments	$1,789.88	$2,210.50
Total Interest for the Term	$45,875.92	$56,656.76
Total Interest Cost	$136,961.31	$169,147.43

Choose to go with a conventional mortgage program. You will save $10,780.84 over five years for a comparable high-ratio mortgage and $32,186.12 in interest expense for a comparable high-ratio mortgage over the amortized period of the loan.

Easy Qualification:

Lenders have less flexibility in the qualification criteria for high-ratio mortgages than conventional or low-ratio mortgages. When applying for a high-ratio mortgage, your application needs to be approved by both the lender and the default insurance provider.

That is not the case with conventional mortgages. Your application is only reviewed for approval by the lender. An uninsurable mortgage is a conventional mortgage available for an amortization period of up to 30 years.

The extended amortization period will reduce the debt-service ratio stress and your required monthly payment.

High-Value Properties:

A conventional mortgage will allow you to buy a high-value property (properties with a purchase price of $1 million or more). High ratio mortgages restrict property value to a maximum of \$999,999.

More Equity In The Property:

A conventional mortgage will leave you with a portion of the equity in your home. The equity is your asset and can be converted to cash if you sell the house or borrow against it using a second mortgage, Home Equity Loan, or Home Equity Line Of Credit (HELOC) program.

Cheaper Cost Of Borrowing:

Default insurance premiums are not a requirement for conventional mortgages. Either the premium is not required, or the lender pays for it.

Even though this cost is often added to the mortgage loan, it is considered part of the borrowing cost and is included in the annual percentage rate (APR), your mortgage’s actual interest rate costs every year. This rate includes all the upfront costs, including the lawyer and origination fees.

Mortgage Loan Options And Competitive Rates:

More lenders offer conventional mortgage loans than high-ratio mortgages. Most monoline lenders, B-Lenders, and mortgage trust companies only offer conventional mortgages. This makes it easier to find the right mortgage for your unique needs at competitive interest rates.

Also, conventional mortgages allow you to afford investment properties and different vacation or secondary homes.

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Disadvantages Of Conventional Mortgages

High Down Payment Requirement:

Unfortunately, not everyone today can save the $100,000 required to buy a $500,000 home. Also, with skyrocketing house prices, taking the conventional mortgage route is becoming more difficult, given the large down payment.

Especially if you are a first-time home buyer, a conventional mortgage may not be a feasible option given the high down payment requirement.

High-Interest Rates:

Mortgage rates for conventional mortgages are higher than those for a comparable high-ratio mortgage.

High-ratio mortgages are default insured, which reduces the lender’s risk. Given the lower risk on high-ratio mortgages, they offer a lower mortgage rate.

The lender’s insurance premium fee is borne with the insurable mortgage (a conventional loan). This insurance premium is an additional origination cost for the lender. Lenders factor this cost into the mortgage rate for this type of loan.

This explains why mortgage rates on conventional loans are higher than those of comparable high-ratio mortgages.

More Location Restrictions:

Don’t be surprised that your location may make getting approved for a mortgage difficult, even with your high down payment. Lenders have marketability concerns for properties in rural areas and suburban locations with a lack of many real estate activities.

Given that most of these mortgages are not default insured, the lender will bear the costs of selling the property and recouping the entire outstanding loan amount in case of a foreclosure.

How To Qualify For A Conventional Mortgage Loan

Debt-Service Ratios:

Debt service ratios are qualification metrics mortgage lenders use to assess your capability to repay a mortgage loan.

One of the qualification metrics is the Gross Debt Service ratio, which is focused on how your gross income can cover the direct costs (mortgage payment, property tax, and utilities) of owning the property.
Another metric is the Total Debt Service ratio, which assesses how well your gross income covers your debts (real estate and personal loans).

Lender Type	Max GDS	Max TDS
Prime Mortgage	39%	44%
Alternative Mortgage	50%	50%

If you are applying for a mortgage with a prime lender or seeking a conventional prime mortgage, the maximum GDS ratio is 39%, and the maximum TDS ratio is 44%.

The ratios are higher for an alternative lender.

Credit Character

Conventional mortgage solutions have flexible credit requirements. You can get approved for a conventional mortgage loan even with a credit score of less than 600.

To qualify for a conventional mortgage solution with a low mortgage rate, you should aim for a credit score of 600 and above, no missed payments in the past two years, and no active collections, judgments, bankruptcies, or consumer proposals.

You still qualify for a conventional mortgage solution with a credit score of less than 600, but do not expect the low mortgage rate advertised for prime mortgage clients.

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Income Types

It is how you want to prove income or, better yet, how you earn money to make the mortgage loan payments.

Your income can come from being employed and working full-time, earning a consistent salary every week, bi-weekly or monthly, or you are not permanently disabled, receiving monthly disability payments, or are retired and on a monthly pension.

This type of income is easy to validate by reviewing your employment letter, paystub, T4 statements or Notice of Assessment, or bank statement showing consistent deposits of this amount.

The other end of the spectrum is self-employed. Some small business owners do not have the resources to employ a full-time accountant or bookkeeper, so their business’ financial books are not in order. Given the guidelines by which traditional lenders like major banks operate, it is hard to validate this income source.

With self-employed income, your best bet for an easy and fast mortgage approval will be going with an alternative lender. These lenders have flexible income qualifications and underwriting criteria. As mentioned above, you will need at least 20% of the property value as a down payment if you buy your next home with a self-employed income.

Property Usage

How you intend to use the property is another factor when determining your minimum down payment.

Generally, if you buy your next home as a rental, you must put down at least 20% of the purchase price, regardless of your income type, credit score, or lender type. The lender may require you to put down if you are applying with a bad credit score or self-employed income.

On the other hand, you don’t need to put that much money down for a down payment if you buy your next owner-occupied, vacation, or second home property. You will go by the 5%, 10%, and 20% rules explained above if insured. However, if it is not issued, the minimum down payment required will be 20% of the purchase price.

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Conventional Mortgage In Canada: Everything You Need To Know

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In This Article

Overview Of A Conventional Mortgage In Canada

What Is A Conventional Mortgage In Canada?

Conventional Mortgage Vs. High-Ratio Mortgage

Shop Across 25+ Lenders For Your Best Mortgage Deals

Benefits of Conventional Mortgages

Lower Interest Expense:

Easy Qualification:

High-Value Properties:

More Equity In The Property:

Cheaper Cost Of Borrowing:

Mortgage Loan Options And Competitive Rates:

Shop Across 25+ Lenders For Your Best Mortgage Deals

Disadvantages Of Conventional Mortgages

High Down Payment Requirement:

High-Interest Rates:

More Location Restrictions:

How To Qualify For A Conventional Mortgage Loan

Debt-Service Ratios:

Credit Character

Shop Across 25+ Lenders For Your Best Mortgage Deals

Income Types

Property Usage

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