What Is a Conventional Mortgage? What to Know About Conventional Home Loans

Posted by Dave Kotler on Tuesday, April 18th, 2023 at 2:50pm.

Is a Canadian Conventional Mortgage Right for You? Interested in buying a home? One of the first ways prospective homebuyers get a home mortgage loan is by applying for a Canadian Conventional Mortgage. This loan makes owning property easy and accessible for almost anyone. Although numerous types of home mortgages are available, sticking with a conventional loan is ideal for you first home because it help you avoid common mortgage mistakes. Many residents meet the qualifications to get approved for a Conventional Mortgage Loan, while others may need to make a few adjustments and work on specific factors to get a lender's approval. Here's what you need to know about this classic homebuying option.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

What Is A Conventional Mortgage

This type of mortgage loan is not tied to a lender or high-ratio insurance premium. Chartered banks do not need to require insurance for mortgage financing as long as a borrower is prepared to make a down payment in which they meet the limit established within the current mortgage insurance industry.

The 5-year conventional mortgage interest rate has recently increased and may do so again in the future. Some individuals may want to choose a smaller home or one with lower prices to take out a more manageable home loan. Borrowers benefit from a conventional mortgage in that they have more initial equity in a home. This allows them to use a Home Equity Line of Credit (HELOC) and other useful financing tools. Such an option may come in handy for those making a large purchase in the future. A conventional mortgage is not the only option for potential borrowers. Other financing options include convertible mortgages, variable-rate mortgage,s and fixed-rate mortgages.

Conventional Mortgage Loans and the Down Payment

Lenders once expected more from applicants, with the ideal mortgage down payment as high as 25 per cent. Thankfully, this expectation has lowered to 20 per cent. Putting down such a sum establishes sizable initial equity in a home and provides a lender the security needed to offer better mortgage terms. This does not mean that those making a smaller down payment cannot be approved for a conventional loan. Individuals may make a down payment that ranges from 5 to 20 per cent. However, those putting down less who are approved for a conventional loan will need to pay Private Mortgage Insurance or PMI.

PMI is an additional fee that will need to be regularly paid to a lender and does not impact the outstanding balance of a conventional loan. The high ratio mortgage is then insured by AIG, Genworth or CMHC. This additional payment can run as much as 4.00 per cent for those putting down 5 to 9.99 per cent. Borrowers who want to be eligible for the best terms and avoid an insurance premium may want to make a down payment of 20 per cent or more as part of the terms of their mortgage agreement.

Canadian Conventional Mortgage Loan Requirements

How does one know if they are likely to be approved for a conventional loan? A down payment of 20 per cent or more will put one in the position to take advantage of a standard mortgage without mortgage insurance or what is often called LMI. Depending on the area, it can be hard to find high-ratio mortgages available for those offering a smaller down payment.

Credit score and credit history is important to a mortgage lender. Those looking to get approved for a mortgage loan may want to first review their credit report. Addressing inaccuracies and paying down outstanding debt are ways to slowly improve the credit scores provided by Equifax and TransUnion. It is possible to request a free credit report from Equifax Canada and TransUnion Canada online or by mail, fax and telephone. A fee may be added when ordering a credit report online.

A lender wants to work with someone with a good debt-to-income ratio, a history of regular payments, and consistent employment. Borrowers will need to pass a lender's “stress test” and show a higher likelihood of paying off a conventional mortgage loan. Borrowers with poor credit may be required to get a co-signer for the loan, provide a larger down payment or be approved at a higher interest rate. Lenders may also choose turn down an applicant for a loan.

Other Types of Mortgages

In addition to conventional mortgages, there are several other home mortgage options available in Canada. Here are some of the most common types:

High-ratio mortgages: High-ratio mortgages are similar to conventional mortgages, but they require a smaller down payment of less than 20% of the purchase price. To offset the increased risk, high-ratio mortgages are typically insured by the CMHC or other insurers.
Fixed-rate mortgages: Fixed-rate mortgages have a set interest rate for the entire term of the mortgage, which is typically between one and ten years. This means your mortgage payments will remain the same throughout the term, regardless of any changes in the interest rate.
Variable-rate mortgages: Variable-rate mortgages have an interest rate that fluctuates with changes in the prime lending rate. This means your mortgage payments may increase or decrease over the term of the mortgage.
Open mortgages: Open mortgages allow you to pay off your mortgage in full or make additional payments without penalty. They usually have higher interest rates than closed mortgages.
Closed mortgages: Closed mortgages have restrictions on how much you can prepay without penalty. However, they often have lower interest rates than open mortgages.
Cash-back mortgages: Cash-back mortgages give you a lump sum of cash when you take out the mortgage. This can be used for things like home renovations or paying off other debt. However, these mortgages often have higher interest rates than other types of mortgages.

It's important to consider all your options when choosing a mortgage, as each type has its own pros and cons. Your lender can help you understand the differences and choose the best mortgage for your needs.

Explore Your Home Financing Options

While some may be approved for a conventional home mortgage loan, others find that other types of mortgage loans are better suited for their specific situation. With a variety of mortgage loans available, even those with poor credit or making a small loan may be approved for a home loan. Terms may vary by lender with any mortgage loan product. Speak with a reputable lender to gain more insight into eligibility requirements for a conventional mortgage loan and other common home loans.