Why a Bigger Down Payment Doesn't Mean a Better Rate
In this episode, Scott breaks down one of the most misunderstood topics in Canadian real estate: why putting more money down doesn't always mean you'll get a better interest rate. Scott walks through the three types of…
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Show notes
Scott Dillingham is a Licensed Mortgage Agent Level 2 who has helped clients finance over $2B+ in real estate. He works closely with REALTORS® to help their clients get financing approved — and in this episode, Scott breaks down one of the most misunderstood topics in Canadian real estate: why putting more money down doesn't always mean you'll get a better interest rate.
Scott walks through the three types of residential mortgages in Canada — insured, insurable, and conventional — and explains exactly how each one affects the interest rate your clients will be offered. Many buyers are shocked to learn that a 5% down payment can actually result in a lower rate than a 20% down payment, and Scott explains the mechanics behind this in plain language you can use with your clients.
From CMHC default insurance to bulk backend insuring, Scott demystifies the lender's perspective on risk and pricing. He also covers the quirky amortization limitation that comes with insurable mortgages — why a client with 20% or more down is capped at a 25-year amortization if they want to access better rates — and how that stacks up against the newer 30-year amortization available to first-time buyers with less than 20% down.
Scott also covers special-case scenarios where lenders will require CMHC insurance even on high-down-payment deals — such as properties near commercial zones or train tracks — and how that can actually work in the buyer's favour by unlocking better rates. This episode is packed with conversation starters you can use to keep hesitant buyers off the sidelines and moving toward a purchase.
Key Takeaways
- Insured mortgages (less than 20% down) typically have the best interest rates because the lender's risk is fully covered by CMHC, Sagen, or Canada Guaranty default insurance.
- Insurable mortgages (20%+ down with backend bulk insurance) offer the next best rates — no fee to the borrower, but the lender secures group insurance behind the scenes at a discounted cost.
- Conventional mortgages (20%+ down, no insurance) carry the highest rates because the lender absorbs all risk in the event of a default.
- Clients with 20% or more down are capped at a 25-year amortization if they want insurable rates, while those with less than 20% can access 30-year amortization as first-time buyers.
- The CMHC fee for a 5% down purchase is 4% of the loan amount — often higher than the fees charged by private lenders, which puts private lending fees in perspective.
- Some properties with unique risk factors — such as those near commercial zones or train tracks — may require CMHC insurance regardless of down payment, which can actually benefit the buyer with better rates.
- Understanding these tiers helps REALTORS® keep hesitant buyers moving forward by clearly explaining why waiting to accumulate a larger down payment may not result in the rate savings they expect.
Show Resources
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Links and Show References
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- (00:00) - Introduction: Down Payments & Interest Rates
- (00:38) - The Three Types of Residential Mortgages
- (01:18) - Why 5% Down Can Get You a Better Rate Than 20%
- (02:32) - Insurable Loans: The Middle Tier Explained
- (03:29) - The 25 vs 30-Year Amortization Quirk
- (04:38) - Conventional Loans: Highest Risk, Highest Rate
- (05:10) - Helping Clients Understand Their Options
- (06:16) - Special Cases Where CMHC Insurance Is Required
- (07:06) - Wrap-Up & Call to Action
Realtor questions from this episode
Why can a 5% down payment get a better rate than 20% down?
Scott explains that with less than 20% down the loan is insured (CMHC, Sagen or Canada Guaranty), and the insurance reimburses the lender if the borrower defaults. The lender's risk is minimal, so it gives better pricing. That is why buyers with 20% down are often surprised they cannot get the insured rates.
What are the three types of residential mortgage Scott describes?
Insured (less than 20% down, with a default insurance fee built into the loan), insurable (20% down or more, where the lender buys bulk insurance behind the scenes so there is no fee to the borrower), and conventional (20% down, 30-year amortization, no insurance, so the risk sits fully with the lender and rates are higher).
Can a buyer with a large down payment still be required to have mortgage insurance?
Yes. Scott says some properties, such as one in a commercially zoned area, next to a convenience store or with train tracks in the backyard, can lead a lender to require CMHC or other insurance even with a high down payment.
Transcript
Transcript of the episode as recorded. Rates, fees and program details are as stated on the recording date and may have changed.
Welcome to the Closing More Deals podcast.
Welcome to the Closing More Deals podcast. I'm your host, Scott Dillingham. Today I'm gonna be talking to you about the different down payment amounts and what that does to your interest rate. Now this is very, very important to know because I've had buyers that literally wanted to wait on the sidelines because they wanted to get the lowest rate and they were being quoted higher elsewhere and I had to sit down and explain to them. why they were being quoted higher. They didn't quite understand.
So I want to explain this to you because when you understand this, it will help you to explain everything to your clients. So there are three types of loans. uh More so this is residential side I'm speaking about, but there is the insured loans. There's the insurable loans and then there's conventional. Okay, so I'm going to cover all three what that means and we're going to talk about down payments, et cetera, et So less than 20% down in Canada is insured.
So that means there's going to be a CMHC fee or Sagen or Canada Guaranty, doesn't matter. There's going to be one of those default insurance fees built into the loan. Now, traditionally speaking, these rates have the best rates in the market. People think the opposite. When they call us, they're like, well, I have 20% down, I should get a better rate. It doesn't work like that. And I'm gonna tell you why. So it'll help you with your clients and it will help you to close more deals.
So what happens is the lenders, if you put down 5% down, it might sound more risky than if you put 20% down. But because of the default insurance, that guarantees the lender. So if there's a default, it doesn't matter to the lender. because they're getting reimbursed by the insurance company because the borrower paid the CMHC fee. So there's incredibly minimal risk to the lenders in this case. So because it's less risky, they'll give you better pricing. So that's why 5% down gives you a better rate than 20% down.
And that is why the 20% down you know, clients are upset because they…
And that is why the 20% down you know, clients are upset because they can't get those lower rates because it's, not applicable to them. I'm going to touch, like I said, I'm going to touch on all the options here so you can understand and it, it should be very clear, uh, and, help you out. So next up is insurable. So insurable ultimately starts when you have 20% down or more. could be any amount. Um, the lenders, if you do the loan as insurable, There's no CMHC fee to the customer, but behind the scenes, the lender's getting bulk insurance.
So it's still getting insured on the backend, but because they're insuring multiple loans together, they are getting a discount on the CMHC fees, and it's just so much better for the lender. So um you get still really fantastic rates. not as good as insured, but it still gives you those really solid rates. Now the only problem with insurable, and it's a little bit weird because they haven't connected everything. That's what I don't like about how the mortgage industry is set up.
They don't connect everything. So I can buy a home and I can do 30 year amortization as a first time home buyer. But if I have more than 20% down, and I want an insurable mortgage so I can get a better rate but not have to pay a fee, I can only get a 25 year mortgage. Like how does that even make sense? They should align everything together but they're not there yet, not sure if they ever will be. But the insurable still has a lower risk to the lender.
Now there's a higher cost on an insurable loan to the lender because they're paying that CMHC fee. Now again, they're buying it in bulk, so they're getting a discount, but that's why the rates are slightly higher than if you go insured because it's not a charity. They're gonna get that money back, right? So they increase the rate slightly so that way you end up paying them back for their costs of getting the behind the scenes CMHC fee. Then lastly is conventional.
So conventional is I've got 20% down, I can get the 30 year…
So conventional is I've got 20% down, I can get the 30 year amortization. There is no insurance whatsoever involved in the transaction. So that means the risk is fully on the lender. So if I default, yeah, there's a decent equity position there, but if I default and the lender incurs a loss, it's the lender's loss. It's all built in. So they charge higher rates for that, okay? And that offsets their risk. But again, that I think is a massive uh disruption or a massive conversation piece for clients, because they see these insured rates and they want them and they can't get them.
And then like I said, I've had clients that were gonna sit out on the sidelines until I explained it all to them and they're like, okay, yeah, this makes sense. We'll move forward. So there's pros and cons because yeah, your rates higher, but you're also saving. thousands of dollars of CMHC fee, right? Like if you're putting just 5% down, and it's funny because people, you know, when they hear private lenders charging fees of 2 to 3%, they're like, oh my God, that's crazy.
However, when you're buying with 5% down, you're literally paying the government of Canada, because CMHC is a crown corporation, you're paying them 4% of your loan as a fee. Do you know I mean? So, private lending is not that crazy of fees when you consider that. but people don't see that, but it doesn't matter. The point is, I wanted you to know the difference between the rates, why they're different, the different down payment requirements for those rates, and why it matters.
Now there are scenarios, just to wrap this up, there are scenarios where you will be required to get CMHC insurance or some type of insurance if the down payment is still really large. So we saw one where it was like kind of a commercially zoned area. There's a property there, the convenience store next door or train tracks in the backyard, like weird stuff like that. Lenders will say, hey, this is not an attractive property. So you have to get CMHC insurance.
So we're protected.
So we're protected. That's the only way we're going to do this loan. So there are cases like that that you'll see. But then again, your borrower gets those better rates, right? Because it's insured. uh So keep that in mind, right? Even though you have a high down payment, there still could be CMHC. ah And yeah, that's really it. So I wanna share this. I hope it was helpful. Please like, share, subscribe, all that good stuff. It means the world to me and I look forward to seeing you guys next week.