What Is a Conventional Mortgage in Canada?

The word “conventional” can make a mortgage sound like a particular rate or repayment plan. In Canada, it primarily describes the relationship between the amount borrowed and the property’s lending value. A conventional mortgage in Canada is a mortgage of no more than 80% of the property’s lending value. In a typical home purchase, that generally means providing a down payment of at least 20%. Mortgage loan insurance is usually not required at that level, although a lender can require it in some circumstances.

How a Conventional Mortgage Works

The defining number is the loan-to-value ratio, or LTV. It compares the mortgage amount with the property’s lending value.

For example, buying a $500,000 home with $100,000 down leaves a $400,000 mortgage. The mortgage represents 80% of the purchase price, placing it within the conventional mortgage definition used by the Canada Mortgage and Housing Corporation.

Increase the mortgage above 80% of the lending value and it becomes a high-ratio mortgage instead. That distinction is the basis of the conventional vs. high-ratio mortgage comparison.

Does a Conventional Mortgage Require 20% Down?

For a straightforward purchase where the lending value corresponds with the purchase price, a 20% down payment produces an 80% LTV mortgage.

Putting down more than 20% lowers the ratio further. A $150,000 down payment on a $500,000 property, for instance, leaves a $350,000 mortgage and a 70% LTV.

The 20% figure should not be confused with Canada’s general minimum down-payment rules. Buyers purchasing eligible lower-priced homes can make smaller down payments, but a down payment below 20% will typically require mortgage loan insurance. The current Canadian down-payment requirements set the minimum at 5% for homes priced at $500,000 or less, with a graduated requirement for homes between $500,000 and $1.5 million. Homes priced at $1.5 million or more require at least 20%.

The separate question of how much equity is needed for this type of financing is covered more closely in conventional mortgage down-payment requirements.

Do Conventional Mortgages Need Mortgage Loan Insurance?

Mortgage loan insurance is generally associated with mortgages above 80% LTV. It protects the lender if the borrower cannot make the mortgage payments, rather than protecting the borrower.

A conventional mortgage therefore usually avoids the mandatory insurance requirement that comes with a smaller down payment. Avoiding the premium can reduce the amount that needs to be financed because an insurance premium added to a mortgage becomes part of the principal and accrues interest.

However, reaching a 20% down payment does not create an absolute guarantee that the mortgage will be uninsured. A lender may still require mortgage loan insurance in certain circumstances, including some cases involving a borrower’s credit history or self-employment.

That distinction matters when considering whether mortgage insurance is required with a conventional mortgage. Conventional describes the LTV position. It does not mean insurance can never be involved.

Can a Conventional Mortgage Be Open or Closed?

Conventional does not determine the mortgage’s prepayment rules. A conventional mortgage can have other features that describe how the contract operates.

For example, a mortgage can be conventional and closed at the same time. The first label describes an LTV of no more than 80%, while the second describes restrictions on making additional payments or repaying the mortgage before the term ends.

Under the federal explanation of open and closed mortgage features, closed mortgages generally restrict the amount of extra money you can put toward the mortgage each year, while open mortgages provide greater prepayment flexibility.

A conventional mortgage can likewise have a fixed or variable interest rate and a short or long term. Those features are separate choices rather than part of the conventional-mortgage definition.

Does a Conventional Mortgage Have Different Amortization Rules?

Having at least 20% down can affect the amortization options available through a lender.

For mortgages with a down payment of more than 20%, the lender sets the maximum amortization period. By comparison, federally insured mortgages with less than 20% down are generally limited to 25 years, with up to 30 years available when the borrower is a first-time buyer and/or purchasing a new build.

A longer amortization can lower the required periodic payment because repayment is spread over more time, but it also increases the amount of interest paid over the life of the mortgage.

Does a Conventional Mortgage Automatically Have a Better Rate?

A conventional mortgage does not guarantee a lower mortgage rate.

Lenders consider several factors when determining the rate offered to a borrower, including the mortgage term, fixed or variable structure, credit history, lender and available discounts. Mortgage insurance can also reduce a lender’s exposure to default on an insured mortgage, so putting more money down should not be treated as a guarantee that your quoted interest rate will be lower.

Compare actual offers instead. The relevant comparison includes the interest rate and the other contractual features attached to the mortgage, rather than using the conventional label as a shortcut for determining which loan costs less.

What Should You Check Before Choosing a Conventional Mortgage?

Reaching 20% equity answers only the LTV question. You still need to qualify for the mortgage and decide which contract features fit the purchase.

Look at the rate, term, amortization, payment frequency and whether the mortgage is open or closed. For federally regulated lenders, the mortgage disclosure must also identify matters such as applicable prepayment privileges, prepayment penalties and mortgage default insurance charges.

The larger down payment deserves attention as well. Putting more money into the property reduces the mortgage principal, but it also commits more of your available cash to the purchase. Your home-buying budget still needs room for expenses such as mortgage closing costs in Canada rather than assuming every available dollar can go toward reaching or exceeding 20%.

Questions About Conventional Mortgages in Canada

Is an uninsured mortgage always a conventional mortgage?

Not necessarily. “Conventional” refers to a mortgage of no more than 80% of the property’s lending value. Insurance status is related but separate, and mortgage insurance can exist even where the borrower has at least 20% down.

Can a first-time homebuyer get a conventional mortgage?

First-time buyer status does not prevent you from getting one. If the mortgage is no more than 80% of the property’s lending value and you meet the lender’s requirements, it can be conventional.

Can a conventional mortgage have a 30-year amortization?

Potentially. When the down payment is more than 20%, the lender determines the maximum amortization it will offer.