What Is A High-Ratio Mortgage?
Table of contents
As housing prices continue to climb, high-ratio mortgages can be a great option for aspiring homebuyers to purchase a home. These types of mortgages allow you to buy a home with as little as a 5% downpayment, making it an attractive option for those who may not have significant savings.
However, it’s essential to understand how high-ratio mortgages work and the costs involved. This post will break down the features of a high-ratio mortgage, helping you determine if it’s the right solution for your home purchase.
Key Takeaways
- A high-ratio mortgage allows you to purchase a home with a downpayment of less than 20%.
- Mortgage default insurance is required for high-ratio mortgages, and if added to your mortgage, it can increase your borrowing costs.
- Restrictions include a purchase price of less than $1 million and an amortization of up to 25 years (30 years for first-time buyers purchasing a new build).
What Is a High-Ratio Mortgage?
A high-ratio or insured mortgage is any mortgage in which the downpayment is less than 20%, the amortization is 25 years or less, and the home price is less than $1,000,000. The only exception to the 25-year amortization rule is if the purchased home is a new build and the borrower is a first-time homebuyer, allowing you to extend the amortization to 30 years.
This type of mortgage requires mortgage default insurance, also known as CMHC or high-ratio insurance, which protects the lender if the borrower defaults. The borrower must pay for this insurance, which can be included in the total mortgage amount and paid off with each mortgage payment or paid as a lump sum upfront.
In Canada, the minimum downpayment requirements for a high-ratio mortgage are 5% for the first $500,000 and 10% on any remaining amount between $500,000.01 and $999,999.99. Homes valued at $1,000,000 or more require a 20% downpayment and cannot be default insured, meaning they will not require mortgage default insurance.
Loan-to-Value Ratio (LTV)
The loan-to-value (LTV) ratio will determine whether your mortgage qualifies as a high-ratio mortgage. This ratio compares the total loan amount to the property value or purchase price. If your LTV ratio exceeds 80%, your downpayment will be less than 20%, and your mortgage will be considered high-ratio.
For example, if you purchase a home valued at $600,000 and put down the minimum downpayment required of $35,000 (5% of $500,000 = $25,000 and 10% of $100,000 = $10,000), your mortgage would be $565,000, and your LTV ratio would be approximately 94%, requiring a high-ratio mortgage.
$565,000 / $600,000 = 0.9416 or 94.16%
Now, say you put down $150,000 instead as a downpayment. This would leave you with a mortgage amount of $450,000, and your LTV ratio would be 75%. This represents a 25% downpayment, meaning this mortgage would not be considered high-ratio since the LTV is lower than 80%.
$450,000 / $600,000 = 0.75 or 75%
High-Ratio vs Low-Ratio Mortgage
A high-ratio or insured mortgage is any mortgage with a downpayment of less than 20%, an amortization of 25 years or less (unless you’re a first-time buyer purchasing a newly built home), and a purchase price of less than $1 million. These mortgages require mortgage default insurance paid by the borrower.
A low-ratio or insurable mortgage is any mortgage with a 20% or more downpayment. Like high-ratio mortgages, a low-ratio mortgage requires a purchase price of less than $1 million and a 25-year or less amortization. Low-ratio mortgages also require mortgage default insurance, which can be paid by either the borrower or the lender. Some lenders require the borrower to pay the premium, while others may cover it.
High-Ratio Mortgages vs. Conventional Mortgages
Conventional or uninsured mortgages require a downpayment of 20% or more. These mortgages differ from high-ratio and low-ratio mortgages in that the lender has either decided not to obtain mortgage default insurance as the mortgage is set up under a collateral charge registration, the property’s purchase price exceeds $1 million, or the amortization is over 25 years.
Example Cost Comparison
The chart below compares the cost difference between high-ratio, low-ratio, and conventional mortgages. To make a better comparison, we’ve chosen a 25-year amortization and used the minimum downpayment required for each mortgage. Calculations are based on nesto’s posted rates for each mortgage type and use a 5-year fixed rate term with monthly mortgage payments.
| High-Ratio (Insured) | Low-Ratio (Insurable) | Low-Ratio (Insurable) | Conventional (Uninsured) | |
|---|---|---|---|---|
| Purchase Price | $600,000 | $600,000 | $600,000 | $600,000 |
| Amortization | 25 years | 25 years | 25 years | 25 years |
| Interest Rate | 4.34% | 4.54% | 4.54% | 4.84% |
| Minimum Downpayment | $35,000 | $120,000 | $120,000 | $120,000 |
| Mortgage Amount | $565,000 | $480,000 | $480,000 | $480,000 |
| Mortgage Default Insurance (CMHC) | $22,600 | $11,520 | $11,520 | $0 |
| Total Mortgage Amount | $587,600 | $480,000 (Premium paid by lender) |
$491,520 (Premium paid by borrower) |
$480,000 |
| Total Principal Paid (5-Year Term) | $73,084.42 | $58,298.74 | $59,697.91 | $56,239.91 |
| Total Interest Paid (5-Year Term) | $118,924.34 | $101,742.53 | $104,184.34 | $108,648.79 |
Mortgages giving you a headache?
Take a breather and work with nesto experts to make it easy for you.
Qualifying for a High-Ratio Mortgage
Qualifying for a high-ratio mortgage will involve the same process as insurable and uninsured mortgages. Lenders will assess your employment, income, debt, and assets to determine if you can comfortably carry the addition of mortgage payments with your other expenses.
To improve your chances of qualifying for a high-ratio mortgage, consider the following:
- Pay down existing debts to reduce your overall debt load. This will improve your debt service ratios and chances of getting mortgage approval.
- Improve or maintain your credit score by keeping a good repayment history and credit utilization at or below 30% of your total credit limits.
- Have all documentation that provides proof of income and employment stability ready.
Pros and Cons of a High-Ratio Mortgage
Like any decision that can impact your finances, high-ratio mortgages have pros and cons. A high-ratio mortgage allows you to enter the housing market sooner with a smaller downpayment rather than waiting longer to save enough to put 20% down. Purchasing a home sooner can build equity, allowing you to benefit from potential property appreciation. Unlike uninsured and insurable mortgages, interest rates are typically lower since having mortgage default insurance lowers the lender’s risk.
However, the cost of mortgage default insurance can add thousands of dollars to closing costs if you pay the amount upfront, or it will increase your mortgage balance if you include it as part of your mortgage. Despite the lower interest rates offered, adding default insurance to your principal increases your mortgage balance and the amount of interest you will pay over the life of the mortgage. If you are adding default insurance to your mortgage, you will also require a higher income to qualify since you are stress-tested based on the total mortgage amount.
Additionally, high-ratio mortgages limit the maximum allowable price of a home and amortization period. This can significantly restrict your home search, especially if you live in a high-cost-of-living area like a larger city where home prices typically average over $1 million. Most lenders only allow you to refinance a mortgage once your LTV ratio is below 80% or below 65% if you want to set up a HELOC.
Alternatives to a High-Ratio Mortgage
If you want to avoid the default insurance required with a high-ratio mortgage or save on interest-carrying costs over the life of the mortgage, you have a few options to explore. You can wait until a 20% or more downpayment is saved, allowing you to choose an insurable or uninsured mortgage instead and avoid default insurance premiums.
If you can adjust your budget and purchase a less expensive property, this would require a lower downpayment. A less expensive property could help you reach the 20% downpayment requirement for an insurable or uninsured mortgage without waiting longer to have additional savings.
Is a High-Ratio Mortgage Right for You?
Determining if a high-ratio mortgage is the right solution for you will depend on your financial situation and goals.
- Affordability: Consider your mortgage affordability with a high-ratio mortgage, including the additional mortgage default insurance costs.
- Time Horizon and Investment Potential: If you plan to own the property for a while, the equity built through the appreciation in your property value could more than offset the additional costs of a high-ratio mortgage.
- Housing Market: If you anticipate that home prices will continue to increase, evaluate how delaying your purchase until you have more saved for a downpayment may impact affordability.
- Future Plans: If you anticipate needing to refinance or sell the property within a few years, there may be more cost-effective options than a high-ratio mortgage.
Frequently Asked Questions:
What is a high-ratio mortgage?
A high-ratio mortgage is a home loan in which the down payment is less than 20% of the property’s purchase price, the amortization is 25 years or less, and the property price is less than $1 million. It requires the borrower to obtain mortgage default insurance to protect the lender in case of default.
How does a high-ratio mortgage differ from a conventional mortgage?
A high-ratio mortgage requires a lower downpayment of 5% to less than 20% but restricts you to a maximum amortization of 25 years and a purchase price of less than $1 million. A conventional mortgage requires a downpayment of 20% or more but allows a purchase price of $1 million or more and an amortization of up to 30 years with prime lending.
What is mortgage default insurance, and why do I need it?
Mortgage default insurance protects the lender if the borrower defaults on mortgage payments. It is mandatory for high-ratio mortgages in Canada as the lender’s risk is higher when the downpayment is less than 20%. The cost of mortgage default insurance is called a premium and can be paid upfront or added to the mortgage balance.
Are interest rates higher for high-ratio mortgages?
Interest rates for high-ratio mortgages are lower than those for insurable and uninsured mortgages. Mortgage default insurance mitigates the lender’s risk, allowing them to offer a more competitive rate.
What is the maximum amortization period for a high-ratio mortgage?
The maximum amortization for a high-ratio mortgage is 25 years. However, recent changes allow qualifying first-time homebuyers (FTHB) to extend the amortization to 30 years when purchasing a new build.
Can I avoid a high-ratio mortgage?
You can avoid a high-ratio mortgage and mortgage default insurance premiums by making a 20% or more downpayment when purchasing a home.
Final Thoughts
As housing prices continue to climb, a high-ratio mortgage can help you purchase a property sooner with a minimum of 5% as a downpayment. These mortgages have added costs, including mortgage default insurance premiums and higher interest-carrying costs, that you must consider if adding these premiums to your mortgage.
Nesto mortgage experts can provide personalized guidance based on your unique needs if you’re considering a high-ratio mortgage or exploring other options. Reach out today to explore your options and take the first steps toward owning your dream home.
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.
nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.
Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.
Ready to get started?
In just a few clicks, you can see our current rates. Then apply for your mortgage online in minutes!
