If you’re looking to buy a home, the current real estate environment can be very daunting.Between the pandemic, rising inflation, and the housing crisis, becoming a homeowner seemsmore unattainable than ever. In this article, you will find an overview of…
A conventional mortgage is a loan-to-value ratio mortgage where you pay down 20% or more of the property’s value and get a loan value equivalent to at least 80% of the property purchase price. This means that to qualify for a conventional loan in Canada, you must have a minimum of 20% of the property’s purchase price. The 80% provided by your mortgage lender is usually referred to as the lending value.
Example: With a $50,000 down payment, you can acquire a conventional loan, meaning that the house you want to buy must not be worth more than $250,000. However, if you need to borrow more than 80% of the property’s value, you’ll have to apply for a high-ratio mortgage instead. Also, the down payment used for borrowing conventional loans cannot be borrowed funds. You can use the profits acquired from the sale of other property or personal finances.
- Conventional mortgage loans require a minimum down payment of at least 20% and offer a maximum loan value of 80%. If you get a conventional loan, you will not be required to have insurance because it’s not regarded as a high-risk mortgage
- High-ratio mortgages are loans that can be more than 80% of the property’s value. Borrowers with less than 20% down payment can take out a high-ratio mortgage but will have to pay the additional insurance added to their mortgage
- Collateral mortgage and high ratio mortgage can potentially offer higher amounts on a mortgage than conventional mortgages
What is a High-ratio Mortgage?
High ratio mortgage meaning should not be confused with that of a conventional loan. For high ratio loans, you can borrow with a down payment of less than 20% of the property’s purchase price. You can also refer to a high ratio mortgage in Canada as one with a loan-to-value ratio of more than 80%.
Usually, high ratio loans are insured by the lender who’ll take out mortgage insurance from one of Canada’s three mortgage insurers, including the Canadian Mortgage and Housing Corporation (CMHC), Sagen (formerly known as Genworth Canada), and Canada Guaranty.
Example: If you want to purchase a $250,000 home in Canada but only have a down payment of $25,000, which is less than 20% of the purchase price, the mortgage you should consider is a high-ratio mortgage which requires you to have mortgage insurance.
As a Canadian, having as little as 5% down payment, you can buy a home with a high-ratio mortgage loan. However, because they are considered riskier for banks, the insurance taken out by the lender will be added to your overall mortgage amount.
Conventional Mortgage vs High-ratio Mortgages
Conventional mortgages and high-ratio mortgages are both available to Canadians looking to borrow to finance their home buying needs. With the conventional mortgage loan definition we provided above, you can see that conventional loans limit you to the 80% lending value. In contrast, high-ratio mortgages allow you to borrow more with less than 20% down payment.
Comparing high ratio vs conventional mortgage, the property value for high ratio mortgage loans must not exceed $1,000,000. But for conventional mortgages, loans are restricted to 80 percent maximum of the property’s value. One thing that remains the same between both types of mortgages is that your down payment must come from your resources and not from borrowed funds. The lender may have a ‘sliding scale’ for any properties above $1,000,000 for added security and reduce his risk
Furthermore, when you take out a high ratio mortgage loan, your lender will get insurance to cover for eventual default on the mortgage and this insurance will be paid by you or attached to your mortgage payment.
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Collateral Mortgage vs. Conventional mortgage
Collateral mortgage loans are among the several options homebuyers can consider when taking out a mortgage in Canada. The question you may be asking is, what is a conventional mortgage loan, and how do they compare against collateral mortgages? We’ve already discussed what conventional mortgages entail, but what is a collateral mortgage?
A collateral mortgage is a readvanceable mortgage where lenders can loan you more funds after the initial loan without you having to refinance your home. A collateral charge is required for this type of loan, and this charge is usually higher than the mortgage loan amount. Collateral mortgage is similar to a HELOC, which allows you to borrow more funds against your home’s equity.
With a collateral mortgage, you get secondary financial security, while conventional mortgages only give you a loan amount that’s at most 80% of your property’s value. However, collateral loans are not transferable from one lender to another, but if you decide to switch lenders, you may need to pay legal fees, even if the mortgage term has expired.
Frequently Asked Questions
What down payment is needed for a conventional mortgage?
To get a conventional loan in Canada, you need to have a down payment of at least 20% of the property’s value. This type of loan is not associated with any form of insurance or high ratio. However, the 20% down payment must not be a loan or borrowed fund but from personal resources.
How do I find the best conventional mortgage rate?
To find the best conventional mortgage rates in Canada, you’ll need to compare lenders using a mortgage rate calculator. But before comparing rates, you should have decided on the type of mortgage you want to take out for your home purchasing needs. Mortgage lenders like nesto will always have the current prices for their products stated on their platform.
Conventional mortgage, high ratio mortgage and collateral mortgage are some of the several options borrowers have to choose from when they decide to finance their home purchase. Ultimately, you’ll need to consider the pros and cons of each type of mortgage or speak with a qualified mortgage expert to decide the best option for the type of house you want to buy. Additionally, the amount you have on hand for the down payment will play a significant role in the type of mortgage you choose.
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