Insured vs. Uninsured Mortgages: Costs, Pros, and Cons
When purchasing a home in Alberta, understanding the difference between insured and uninsured mortgages is crucial. These two mortgage types impact your upfront costs, interest rates, and long-term financial planning. Below, we’ll break down the differences, compare scenarios for a $400,000 home purchase in Alberta, and explore how each option could fit your financial goals.
What Are Insured and Uninsured Mortgages?
Feature
Insured Mortgage
Uninsured Mortgage
Definition
Requires mortgage default insurance when the down payment is less than 20%.
Does not require insurance because the down payment is 20% or more.
Who Pays Insurance?
Borrower pays the premium (added to the loan amount).
No insurance premium required.
Interest Rates
Lower due to reduced lender risk.
Slightly higher due to no insurance backing.
Down Payment Required
Minimum 5% of the home’s purchase price.
Minimum 20% of the home’s purchase price.
Target Borrowers
First-time buyers or those with limited upfront funds.
Buyers with substantial savings who want to minimize long-term borrowing costs.
Scenario Comparison: $400,000 Home in Alberta
Let’s compare two scenarios for purchasing a $400,000 home in Alberta:
Uninsured Mortgage: 20% down payment ($80,000), 5-year fixed term at 5% interest.
Insured Mortgage: 5% down payment ($20,000), 5-year fixed term at 4.5% interest (lower rate due to insurance).
Key Details
Details
Uninsured Mortgage (20% Down)
Insured Mortgage (5% Down)
Home Price
$400,000
$400,000
Down Payment
$80,000 (20%)
$20,000 (5%)
Loan Amount
$320,000
$380,000
Mortgage Insurance Premium
N/A
~$15,200 (added to loan)
Total Loan Amount
$320,000
$395,200
Interest Rate (Fixed)
5%
4.5%
Monthly Payments
Scenario
Monthly Payment
Uninsured Mortgage
~$1,860
Insured Mortgage
~$2,190
Cost Over Time
Over the First 5-Year Term:
Scenario
Total Payments (5 Years)
Principal Paid
Interest Paid
Uninsured Mortgage
~$111,600
~$36,500
~$75,100
Insured Mortgage
~$131,400
~$41,700
~$89,700
Over the Full Amortization Period (25 Years):
Scenario
Total Cost (Principal + Interest)
Uninsured Mortgage
~$558,000
Insured Mortgage
~$657,000
Pros and Cons
Uninsured Mortgages
Pros
Cons
No mortgage insurance premium required.
Requires a significant upfront down payment (20%).
Lower total borrowing costs over time.
Higher interest rates compared to insured mortgages.
Builds equity faster due to a larger initial investment.
May delay home ownership if savings are insufficient for a 20% down payment.
Insured Mortgages
Pros
Cons
Lower interest rates due to lender security provided by insurance.
Additional cost of mortgage insurance premium (~4% of loan amount).
Smaller upfront down payment allows for quicker entry into the housing market.
Higher overall borrowing costs over time due to larger loan amounts and premium financing.
Frees up funds for other uses like renovations or investments.
Builds equity more slowly compared to uninsured mortgages.
Use Cases for Retained Funds with an Insured Mortgage
If you opt for an insured mortgage and retain the extra 15% ($60,000) that would have gone toward a larger down payment in an uninsured mortgage scenario, you could:
Invest in renovations or upgrades to increase your home’s value.
Build an emergency fund or pay off high-interest debt.
Contribute to retirement savings or invest in other financial instruments.
Save for future expenses like education or travel.
Here’s how that retained $60,000 could be allocated:
Use Case
Potential Benefit
Emergency Fund
Provides financial security for unexpected expenses or job loss.
Debt Repayment
Reduces high-interest debt like credit cards or personal loans.
Home Renovations
Increases property value and improves living conditions.
Investments
Generates returns through stocks, mutual funds, or retirement accounts.
Which Option Is Right for You?
The choice between an insured and uninsured mortgage depends on your financial situation and goals:
If you have substantial savings and want to minimize long-term costs: Uninsured mortgages are ideal.
If you’re looking to buy sooner with less upfront cash while benefiting from lower rates initially: Insured mortgages may be better suited.
How I Can Help
As a licensed mortgage broker serving Lac La Biche and Northern Alberta areas, I specialize in helping clients navigate options like insured vs uninsured mortgages. Whether you’re a first-time home buyer seeking affordable mortgages in Lac La Biche or exploring refinancing options in Alberta, I can guide you through every step—from pre-approval to closing.
Contact me today to explore how much mortgage you can afford on your income or find out about today’s lowest mortgage rates in Alberta! Let’s make your home ownership journey smooth and stress-free!
