We don’t buy the numbers in this story.
Its premise is that some people are better off paying for mortgage default insurance—even if they don’t technically need it—just to get a better rate.
Let’s test this theory and see if mortgage shoppers actually are better off by paying CMHC fees. (Spoiler: They aren’t, not on a typical primary residence.)
First things first. The question “should I insure my mortgage to get a better rate” is relevant only to the most aggressive rate shoppers. That’s because the majority of lenders offer either:
A) A 10-15 bps difference (discount) for insured rates, or
B) The exact same rate for both insured and uninsured mortgages.
Assuming we compare similar mortgages, the gap between the lowest 5-year fixed insured rate and lowest uninsured rate is actually 25 basis points or less. There are lower insured rates on no-frills mortgages but their restrictions increase your total implied borrowing cost, so it’s not a fair comparison.
The 45 bps spread quoted by the Canwise broker in the story might reflect the rates he is offering, but it’s not reflective of competitive market-wide rates for comparable prime mortgages.
That’s why paying insurance to get a cheaper rate is almost always a chump move.
But just for fun, we’ve played devil’s advocate and used that broker’s 45-bps claimed spread. The nominal savings of the lower insured rate is $7,653 in this case. But it falls to $6,963 if you calculate the present value of the interest cost difference (which you need to do, but which that broker doesn’t do). Of course, the interest savings would almost always be even less — since the true spread between insured and uninsured rates is almost always less if you shop around.
Now, compare that much heralded savings to the cost of mortgage default insurance at 80.01% loan-to-value. That cost is $10,886 including PST. (We chose 80.01% LTV—instead of the 81% LTV example used in the story — in order to lower the CMHC fee even more.)
The result: Following that broker’s advice would cost this hypothetical borrower at least $3,900 more over five years.
Mind you, insured mortgages do have one other benefit. They potentially allow you to access better rates if you switch lenders at renewal. (Note that only 21% of Canadian mortgagors switch lenders at renewal.)
But here’s the thing. That renewal benefit is usually applicable for only one renewal, if at all. The reasons:
- An 80.01% LTV mortgage will amortize to 65% LTV in about six years—or less if the person makes prepayments. 65% is the magic number to qualify for the best conventional rates, which are often close to the best high-ratio rates (if not the same).
- Even if your mortgage is uninsured, it can usually be “bulk-insured” by your new lender on a renewal. That means you the borrower get a solid insurable rate anyways.
- Many borrowers inevitably refinance, which means their mortgage becomes uninsured regardless.
No Need to Put Down <20%
Unlike the scenario described in the aforementioned story, you don’t need to put 19% down to get an insured mortgage. You can buy insurance at any loan-to-value of 95% or less.
If buying insurance to get a better rate did make sense (and I haven’t seen it work in my decade in the business), you’d be better off putting down 20% instead of 19%. Then you’d pay the lower 80% LTV default insurance premium.
That would reduce your insurance cost (premium) by 40 bps, versus what you’d pay CMHC at 81% LTV.
In fact, the best chance of this manoeuvre actually working is if you’ve got 35% equity or more. At that loan-to-value, the CMHC fee is just 0.60% (i.e., $648 per $100,000 of mortgage, including tax in Ontario). In that case, paying the premium could put you ahead if you were able to save just 0.16%-points on your rate.
The thing is, lenders aren’t stupid. They virtually always arbitrage away these opportunities by setting their pricing such that it incorporates the savings of paying for the insurance.
All this stuff seems really technical, I know. But saving money sometimes is.
Mortgage advice often cannot be taken at face value. I’ve seen too many “advisors” try to talk people into paying insurance fees for a better rate, unnecessarily. If someone tells you to do this on a mortgage for your primary residence, get a second opinion. Have them run the numbers using the best rates (from all lenders) that apply to your situation. The math never lies.