Lots of people hear the term “conventional mortgage” and know that the phrase means a traditional, standard mortgage. But what is a traditional, standard mortgage?
A standard mortgage is one in which the borrower has put down at least a 20 per cent down payment. This down payment is required on all conventional mortgages in Canada and it will help qualify the buyer for better interest rates, and more appealing terms. This is a conventional mortgage and they are some of the easiest mortgages that you could apply for. It’s often thought that individuals with bad credit or a short employment history are not eligible for conventional mortgages; but this is not the case. As long as you’ve made the appropriate down payment, you can apply for a conventional mortgage.
If you do not have the 20 per cent down payment on your home, you will have to borrow more than 80 per cent of the home’s total value. When this is the case, the risk to the lender is substantially greater and so, you will need to purchase additional mortgage insurance. This insurance protects the lender in case you default on the loan, and it can add thousands to your mortgage bill. Mortgages that require additional insurance are called high-ratio mortgages.
High-ratio mortgages, while they’re still available today, are becoming increasingly difficult to find; and this is for many reasons. The first is the tightening of mortgages in Ottawa that’s been going on for the past couple of years. This causes banks and lenders to tighten their rules and be more stringent in their lending. But, there’s also something else that’s causing the banks to pull back on the reins – and that’s what the Bank of Canada is doing.
The BoC has left its interest rate at historic lows for just about two years now; and that’s led to an influx of buyers and borrowers. With so much demand on the mortgage market, lenders have had to be much more selective in who they’re going to give a loan to, making it much harder for anyone to obtain any kind of mortgage.
A conventional mortgage is, at its simplest, a mortgage that is for 80 per cent or less than the property’s value. But while these loans are simple in nature, applying for one can be a very strict process.
