What is a High Ratio Mortgage?

What is a High Ratio Mortgage?

Looking to get on the property ladder but strapped for (down payment) funds? Here, we reel out the insider scoop on High-Ratio Mortgage. If there’s anything that gets Canadians bogged down other than having to buy something online and realize a tad too late that it’s in USD and not CAD, it’s a Mortgage.

. . . But that’s just scratching the surface.

Just when you’re reading up on mortgage jargon, crunching numbers, and scouring the internet for mortgage consultancy, you then agonizingly recall that you’re strapped for cash too.

Implicitly, your down payment—the funds you’re able to part with before the commencement of the mortgage—is insufficient to seek a conventional (low-ratio) mortgage. This is where other special-purpose financing options like a High-Ratio Mortgage become the go-to for many Canadians.

In Canada, mortgages may be high-ratio or low-ratio, and the difference between both can be quite crucial when drawing up your mortgage plan. A high-ratio mortgage, for instance, may mean that you get to pay a significantly higher amount of interest over the life cycle of your loan, potentially costing you a ton of money.

In this guide, we’ll give you a peek into all you need to know in the forgiving world of high-ratio mortgages—its structure, its implications (both legal and financial), and we solve your curiosities about whether or not this is a terrain to homeownership you want to explore.

First, The basics.

What is a high ratio mortgage?

A high ratio mortgage, which is an affordable choice for many Canadians, is a mortgage requiring a down payment of a minimum of 5% and a maximum of 20% of the total cost. In simpler terms, you’ll require less than 20% of the purchase price of the property you’re purchasing.

Typically, the term “high-ratio” here describes the relationship between the mortgage amount (the loan) and the entire purchase price (the value) of the property/home you’re looking to purchase. This is popularly known among experts as the loan-to-value’ ratio.

Consider the following scenario. You’re to purchase a house for about $800,000. And you’re making a down payment of 15%. With the price of the property pegged at $800,000, your down payment (15% of $800,000) will be $120,000. This would then mean that you’d be scouting for a mortgage plan worth $680,000 ($800,000 – $120,000).

Having made a down payment of $120,000 (15% of the total purchase price), your loan-to-value ratio will be 85% (1 – [$120k/$800]).

This mortgage loan accounts for more than 80% of the purchase value of the property, hence, it falls in the ‘high-ratio’ ballpark.

Low-ratio mortgage (or conventional mortgage)

Pretty much what it says on the tin, Low-ratio mortgages are the polar opposite of high-ratio mortgages, and they require a down payment of more than 20% of the purchase price of the quoted property.

Remember our example using a property to the tune of $800,000? Let’s give it a down payment of higher than 20%. Say, 50%. With the value of the property being $800,000, and the downpayment being 50%, the down payment will be $400,000, and that translates into a mortgage loan worth about $400,000. Our loan-to-value ratio is 50%.

In a similar fashion to High-mortgage works, we can see that when you raise your down payment (the total amount of cash you have to part with immediately for the mortgage), the part of the ratio that represents the loan will drop, resulting in a reduction in your loan-to-value ratio, hence the term ‘low-ratio’.

The deets on down payment

Before delving into what Low-ratio or High-ratio mortgage entails, we want to crack the code on Down Payments, how they work, and how they affect your mortgage.

In simple terms, a down payment is the amount of money paid beforehand if you’re purchasing anything not financed by a bank or lending institution. Since most individuals cannot afford to pay the full purchase price for their houses at a go, they will often finance, or get a mortgage loan, for the majority of the amount of the buying price. So, the down payment is the amount of money that buyers contribute to the purchase price using their funds.

In Canada, the down payment requirement is 5% on the first $500,000 in purchase price, and 10% on any amount beyond that. If the home is priced at $1,000,000 or more, then you are required to make a 20% down payment.

In general, mortgages with high loan-to-value ratios are more of a risky affair for both the house buyer and the lender due to the high possibility of default. Since the mortgage accounts for more than 80% of the purchase price in the case of high-ratio mortgages, the house buyer will be required to acquire mortgage insurance.

These insurance premiums are derived using the loan-to-value ratio of the mortgage as a benchmark. So, the lesser the down payment, the more the insurance premiums.

Low-ratio vs. high-ratio mortgage, which is right for me?

Ultimately, before signing the dotted lines on your mortgage agreement, you must take time to internally process and understand (and that includes, of course, seeking expertise where needed) all of the procedures and legal ramifications involved with purchasing a home. That also means it’s a good idea to take stock of your financial position to draw up a budget that reflects your financial capacity.

This will allow you to gain a better foothold on your true financial state especially as it relates to whether you need a low ratio or high ratio mortgage. Summarily, the amount of money you’re able to shell out for a down payment would play a huge role in determining your mortgage research (and acquisition) process, and whether it would be wise for you to obtain a low-ratio or high-ratio mortgage.

Things to consider when securing a high-ratio mortgage

High-ratio mortgages, like other mortgage plans, come with their beneficial value-adding highs and financially demanding lows. In the final analysis, it all depends on your insight and how able you are to leverage this insight to get you the best bang for your bucks.

Interest charges

Interest charges vary across the board. Ultimately, the pendulum of cost implications swings towards whether or not the mortgage is an insured or uninsured one. For good reason, uninsured mortgages are bound to cost more due to their high-risk nature in the event that you default on the scheduled payments. If the mortgage is insured, there is every possibility your lender may be open to negotiating reduced interest rates as they will be entitled to compensation from the insurance company in the event of your default.

Enter the Canada Mortgage and Housing Corporation (CMHC). The CMHC helps the lender with insurance coverage. But bear in mind that the CMHC insurance may cost more than the difference you would get from lower interest rates.

Mortgage default insurance premiums

Owing to the stark reality that high-ratio mortgages are a tad riskier investment for lenders, borrowers must meet a requirement of mortgage default insurance under the Canadian Mortgage Law. This insurance is usually pegged at 2-3.5% of the loan amount and comes as a one-off payment that protects the lender (your financial institution) in the event of a default by the borrower and in the incidence of foreclosure. It also enables borrowers to get the same interest rates as those available in low-ratio mortgages while making smaller down payments.

In Canada, Mortgage default insurance can be obtained from these three organizations: The Canada Mortgage and Housing Corporation (CMHC) and two private insurance companies namely Canada Guaranty and Genworth. Typically, Mortgage Default Insurance in Canada is dubbed as ‘CMHC Insurance’ because Canada Mortgage and Housing Agency (CMHC) is the biggest provider and a taxpayer-backed Crown Company. They also set the pace in terms of mortgage insurance policies for the other two private companies.

Here’s how it works: The borrower bears the cost of the mortgage default insurance premiums. The premiums are often included in the total of your loan and distributed throughout what is called the loan’s amortization period. Impliedly, a chunk of your total monthly payments goes to your insurance coverage.

The Canadian Mortgage and Housing Corporation (CMHC) sets the insurance rates, and these insurance rates may rise in proportion to the amount of the borrower’s Loan-to-Value ratio. You may click here to view the current premium rates. They are also subject to change at any given moment. Ideally, a down payment of 20% or more (low-ratio mortgage) means lower insurance premiums, for this reason, your total mortgage expenses become lower and save you considerable costs.

If, like many potential homeowners, the mere sight of numbers is enough to trigger your anxiety buttons, our mortgage payment calculator will surely come in handy to take the guesswork out of your CMHC insurance cost calculations.

Amortization schedule

Amortization is a timeline, one that schedules the periodic payments of your mortgage. Typically, it runs till the mortgage is paid off at the end of the scheduled timeline. The amortization timeline for insured mortgages lasts no longer than 25 years while that of non-insured mortgages could span as long as 35 years.

Because high-ratio mortgages (insured) have shorter amortization periods, insurance premiums are more financially demanding for the borrower, unlike low-ratio mortgages.

Is a high-ratio mortgage suitable for you?

One of the perks of high-ratio mortgages (insured) is that it opens the housing markets to many first-time buyers who might not have down payments of 20% or more. To achieve this, High-ratio mortgages leverage mortgage insurance instead of larger down payments.

While you might want to consider a low-ratio mortgage if you have about 20% down payment and also about 1.5-3% of the value earmarked for closing cost, 5%-19.99% of downpayment leaves you with a High-ratio mortgage as the obvious choice.

Another thing to consider is that you may need to undergo a ‘mortgage stress test’ qualification at the Bank of Canada benchmark rate. This test is also to prove your creditworthiness (that you have good credit scores), and that you have a clean financial bill of health to foot the home bills and weather the storms of fluctuations in interest rates, as your mortgage progresses.

In addition to meeting the GDS/TDS ratio requirements, high-ratio mortgages also require that you’re able (and willing) to cover the closing costs. Now, you don’t get the house keys without covering some miscellaneous-yet-vital costs that are required to close the mortgage. These expenses include but are not limited to fees related to the drafting and execution of the mortgage (for instance, appraisal fees, home inspection, attorney fees), real estate commissions, fees associated with filing of records, taxes, and insurance.

How do I get an affordable high-ratio mortgage?

Once you have done your due diligence as a home buyer and you have overwhelming evidence supporting the conclusion that a high-ratio mortgage is your go-to—with all boxes checked—you are credit-worthy, you have steady income, but a little short in down payments. Now is the time for you to take these following steps:

Weigh your options. Evaluate the pros and cons

Granted. The pull of taking out insurance may be very alluring especially to first-time home buyers, with a one-of-a-kind shot at buying your dream home without it costing you ‘an arm and a leg’ in upfront payment. The perks notwithstanding, the high-ratio mortgage insurance coverage extends to only your lender (which is usually a financial institution) and you’re going to be the one to cover the costs. There will be no insurance cover for you as the borrower if the payment slips into arrears with the financial institution seeking foreclosure.

And if you do end up making up the shortfall (the deficit), you may be required to reimburse all expenses that your financial institution incurred in the process of trying to get you to repay the loan. Besides insuring the mortgage on behalf of the lender, you may also have to pay taxes in respect of the property and keep it in good shape. You may also want to consider declining or stagnant property values as it pertains to your investment in a home.

That said, while it might sound counterintuitive, high-ratio mortgages are also poised to give you lower interest rates. The expectation would be that the high mortgage would usher in equally high interests, but the lowest rates are usually reserved for high-ratio mortgages as they must be insured on the part of the borrower, thus significantly reducing the risk for lenders against default.

Compare mortgage rates

Taking up a high-ratio mortgage does not rule out the possibility of obtaining an attractive interest rate on your home mortgage loan. One of the most effective methods of saving money on your mortgage is to compare rates from different lenders.

Comparing rates would normally mean asking every mortgage lender on the block for a quote. But that’ll slow down the entire process of you settling for a mortgage plan. Heading to MapleMortgage.ca is a good starting point. All you need to do is to fill out the form to get made-for-you estimates from our rich pool of Canada’s top (and affordable) mortgage lenders/providers within a matter of minutes, saving yourself thousands in interest charges.

Explore the possibility of a bigger down payment

You can also seek financial assistance from friends, family, and other sources to increase your down payments so that you can cover more ground in the loan-to-value ratio.

A bigger down payment absolves you from the responsibility of purchasing CMHC insurance as you would likely surpass the 19.9% minimum requirement for a high-ratio mortgage. Hence, there would be little or no need to purchase CMHC insurance and pay the premiums applicable. You also get to cover more in down payments especially when you’re looking to purchase a cheaper property instead.

Summary

High-ratio payments are a dime a dozen in Canada as they exist to get more first-time home buyers on board even when limited in financial resources. While it remains preferable to avoid a high-ratio mortgage if possible, entering into a high-ratio mortgage may just be your opportunity, as a first-time homebuyer, to own your own home.

With the swathes of tips we’ve let you in on, this is where your ability to research, compare rates, improve your debt ratio & credit score, and seek proper mortgage advice services become valuable in getting you those house keys you’ve always dreamt of, for you and your loved ones.

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