Why a Bigger Down Payment Doesn't Mean a Better Rate

Welcome to the Close 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 hire.

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, 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 gonna cover all three, what that means, and we're gonna talk about down payments, etcetera, etcetera.

Oh, less than 20% down in Canada is insured. So that means there's going to be a CMHC fee or Sage in or Canada Guaranteed. Doesn't matter. There's gonna 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 five percent down gives you a better rate than 20% down. And that is why the 20% down, you know, clients are upset because they can't get those lower rates because it's it's not applicable to them. I'm gonna touch like I said, I'm gonna touch on all the options here so you can understand, and it it should be very clear and and help you out. So next up is insurable.

So insurable ultimately starts when you have 20% down or more. It could be any amount. 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 back end, 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 you get still really fantastic rates, not as good as insured, but it still gives you those those really solid rates. Now the only problem with insurable, and it's a little bit weird because they haven't connected 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 thirty year amortization as a first time homebuyer. 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 twenty five 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 cost of getting the behind the scenes CMHC fee.

Then lastly is conventional. So conventional is I've got 20% down. I can get the thirty 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. That'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 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 I've had clients that were gonna sit out on the sidelines until I explain it all to them, and they're like, oh, okay. Yeah. This makes sense.

We'll we'll move forward. So there's pros and cons because, yeah, your rate's 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 two 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 what I mean? Private lending is not that crazy of fees when you consider that. But people people don't see that, but it doesn't matter.

The point is so 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 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. That's the only way we're gonna 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. So keep that in mind. Right?

Even though you have a high down payment, there still could be CMHC. And, yeah, that's 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.