You might dream of buying a home in any city in Canada, but fear you’ll never be able to afford one. This is where you might consider a high-ratio mortgage. Read on to find out what a high-ratio mortgage is and whether the mortgage payments cost more or less. It will save you time and money with prior knowledge about high-ratio mortgages. 

What is a High-Ratio Mortgage?

In simple terms, a high-ratio mortgage is a type of mortgage where a down payment of less than 20% is required for the purchase price of the property/home you’re buying. The ratio between the mortgage loan amount and the price of the property that you are buying is high, which gives it its name. Some also prefer calling it the loan-to-value ratio (LTV ratio).

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Typically, this type of mortgage allows Canadians to purchase a property or house with as low as a 5% down payment and they make payment of interest on the loan.

How Does it Differ from a Typical Mortgage?

According to our real-estate professionals, a typical mortgage, also known as a low-ratio mortgage or conventional mortgage, is a type of mortgage with more than a 20% down payment of the purchase price of the home you’re buying. 

A high-ratio mortgage has a higher loan-to-value ratio (more than 80% of the money you need) i.e. you’re making a lesser down payment but incurring a higher mortgage amount. 

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On the other hand, a low-ratio mortgage has a lower loan-to-value ratio (less than 80%) i.e. you’re making a higher down payment to qualify for a mortgage but incurring lower mortgage amount.

Another difference between a high-ratio mortgage and a conventional mortgage is that high-ratio mortgages are insured mortgages. They require you to pay mortgage default insurance (CMHC mortgage insurance) which is purchased by the lender, which gives it lower interest rates but conventional mortgages don’t require payment of CMHC insurance. Interest costs also differ.

How Much Does it Cost on Average

For high-ratio mortgages, you need to allocate payment for an CMHC insurance s with less than 20% equity. This comes in the form of an insurance premium and it’s usually charged as a percentage of the loan amount you’re borrowing. 

For instance, you might be buying a property with a home price of $400,000 and making a down payment of 5% ($20,000). The remaining amount on the mortgage may be amortized over 30 years. 

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Our professional team states that you’ll have to pay an additional 4% on the total cost of the mortgage as insurance premiums. This will amount to $15,200 and you can pay for it over the lifespan of the mortgage.

If you increase your down payment to 10% ($50,000), then the insurance premiums that must be paid would be reduced to 3.10% of the total mortgage cost, totaling $13,950 (3.10% * $450,000) over the lifespan of the loan. 

To put it simply, as down payment increases, the insurance premiums that must be paid reduces. However, making a down payment of 20% ($100,000) eliminates these insurance premiums. Here is the CMHC premiums calculator [1] recommended by our real-estate experts to calculate how much premium you must be paying.

Example of a High-Ratio Mortgage

To fully understand what a high-ratio mortgage is, here is a practical example:

in discussion with a client

Mr. Smith wants to buy a home that is worth $300,000 but only has $30,000 for a down payment. The amount Mr. Smith has as down payment is 10% of the property’s purchase price, which is less than 20%. Such a mortgage would be classified as a high-ratio mortgage and Mr. Smith is required to purchase mortgage insurance included in the mortgage terms.

(Looking for ways to settle your home credit? Then, you should know more about the home buyers’ plan form here

Important Reminders

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FAQ

What is a high ratio mortgage?

A high-ratio mortgage is a type of mortgage that allows you to purchase a home with a down payment of less than 20% of the value of the home. With this type of mortgage, the borrower places a down payment of as low as 5%. Since your down payment is small, your mortgage payment will be large, and you will have to pay for CMHC mortgage insurance on high-ratio mortgages from most mortgage lenders like banks, financial institutions, and credit unions.

Why are high ratio mortgages cheaper?

High-ratio mortgages are usually cheaper because they come with lower mortgage rates. A high-ratio mortgage has a lower interest rate than a low-rate mortgage because it is insured.

Conclusion

High-ratio mortgages are very common in Canada. They enable home purchase with a down payment lower than 20% of the home’s value as long as the price is not above $1 million. Those with fewer assets can acquire new property with less interest. If you want to learn more about mortgages, refinancing or compare mortgage rates, speak to a mortgage broker for more details.

For better understanding of real estate and mortgages, we have this list for you! 

Foster Mendez

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