Mortgage Basics #Loan Types

What Is A High-Ratio Mortgage?


One of the main things to think about when getting a mortgage in Canada is whether you want a high or low ratio mortgage. A high-ratio mortgage can significantly impact many factors in your home buying journey, such as whether or not you’ll have to pay for mortgage insurance, how high your interest rates will be, and what your monthly repayments will look like. To make things easier, we’ve put together a quick guide with everything you need to know about high-ratio mortgages.


Key Takeaways
  • A high-ratio mortgage means that your down payment is less than 20% of the total value of your new home, and the amount of money you borrow is more than 80%
  • A high-ratio mortgage may be right for you when you cannot afford, or choose not to put down at least 20% of the total value of a new property
  • High-ratio mortgages require mortgage insurance, which will affect your monthly repayments, since you’ll have to pay CMHC premiums

What is a high-ratio mortgage?

Your mortgage ratio is the total down payment you put towards the value of your new home, compared to the amount of loan you will need for the remaining amount. If you’re planning on getting a mortgage, the size of your down payment will have a significant impact on your budget. How much money are you willing to pay up front, and how much will you borrow? In Canada, if your down payment is less than 20% of the total value of your home, your mortgage is considered high-ratio.

High-ratio vs low-ratio mortgage

If you buy a home with more than 20% of the total cost covered by your down payment, this is considered a low-ratio mortgage. The more equity you are able to pay into the property, the lower your mortgage ratio will be.

  • High-ratio mortgage example

    Let’s say you’re buying a $500,000 home , and you pay down 10% of that up front ($50,000). This means that you’ll need a loan for the remaining $450,000, which is 90% of the total cost to buy your new home. Your ‘loan to value’ (LTV) ratio here would be 9 to 10 (90%), which is considered high-ratio.

  • Low-ratio mortgage example

    Now, let’s say you buy that same house for $500,000, but you put down 25% of the total cost up front ($125,000). That means you only need a loan to cover $375,000. Your loan to value ratio here would be 3 to 4, or 75%. This is an example of a low-ratio mortgage. 

 

Is a high-ratio mortgage bad?

Not necessarily. With Canada’s housing market predicted to heat up even more in 2022, getting a mortgage that suits you is important. But, a high-ratio mortgage does come with a few key implications:

    • First and foremost, you will need to pay for mortgage default insurance, otherwise known as CMHC insurance. This is a federally mandated insurance for mortgages with down payments between 5% and 19.99% in Canada. Check out our CMHC calculator to see how much it could cost you.
    • Secondly, a high-ratio mortgage will affect the cost of your premiums. These will be added to your overall mortgage up front, and are generally between 2 and 4 percent of your total money borrowed. Generally, the higher your LTV ratio, the higher your premiums will be. To understand how your mortgage ratio can affect your premiums, use our mortgage calculator.
    • Your interest rates could be affected. Generally, insured mortgages are less risky to your lender than uninsured ones, since even if you default, they will receive a payout from the insurer. As a result, interest rates on insured mortgages may be lower. Ultimately though, the cost of CMHC insurance will probably outweigh any savings you make with a slightly lowered interest rate.
    • Your monthly repayment will be higher. A high-ratio mortgage that is insured will have a lower maximum amortization period. For insured mortgages, your maximum amortization period will be 25 years, whereas for non-insured mortgages that figure goes up to 35 years. A shorter amortization period means you’ll pay a higher regular mortgage payment.
    • You cannot refinance a high-ratio mortgage. Most lenders will not refinance a mortgage with a loan to value ratio unless it is lower than 20%, however, there are some exceptions. If you need clarification on any aspect of refinancing an insured mortgage, speak to a nesto professional today.

 

Will I need mortgage default insurance for a high-ratio mortgage?

Yes. Any mortgage with a down payment of less than 20% is required by Canadian law to be insured.

When to get a high-ratio mortgage?

A high-ratio mortgage is necessary when you don’t put down at least 20% of the overall value of your new home. If you can manage higher monthly repayments, it may be a better fit to go with a down payment of less than 20% – provided the cost of your home is less than a million dollars. Note that any home with a value above $1,000,000 is legally required to have a 20% down payment as a minimum.

Conclusion

A high-ratio mortgage is a viable way to fund your new home if you cannot, or choose not to put down over 20% of the total value up front. However, there are a lot of benefits to securing a low-ratio mortgage. 

If you are looking to improve your LTV ratio, here’s a few final tips:

  • Look for a house at the lower end of your budget. If you’ve already been pre-approved for a mortgage by your lender, it’s worth looking for a house where your down payment will go further, and get you above the 20% equity threshold.

  • Pay a larger down payment. If there’s room in your budget to pay more up front, or if you can hold off buying a home and save for a larger down payment, you lower your loan to value ratio, and potentially avoid having to pay for CMHC premiums altogether.

  • Compare the best rates. At nesto we provide the best rates available to you and also offer lending directly. A high-ratio mortgage doesn’t mean you’ll get a bad rate. Being able to easily compare the best rates available will help you find a mortgage that suits you best.

 

Need help finding the best mortgage for you? Get started now.

 

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