What is a High-Ratio Mortgage?

Do you know what is a high-ratio mortgage? Buying a home in Canada is a huge expense, especially in cities such as Toronto and Vancouver. Saving up for a down payment can take a lot of time for first time home buyers. Nowadays, Canadians don’t have to save the full 20% for a down payment. That’s okay because you only need a 5% down payment to get a mortgage. However, paying less than 20% will result in what is called a high-mortgage ratio.  

What is the minimum down payment required for a mortgage? 

The down payment is the amount you will put down when you purchase a home. This is a lump sum of cash that will be used to secure the purchase. If you are a previous homeowner, you can use some of the money you received from the sale of your home. First time buyers will need to save up for a down payment. The down payment is the largest upfront cost you will have when buying a home and there is a minimum requirement. 

In Canada, the minimum down payment required for a mortgage ranges from 5% to 20% of the property’s value, depending on the home you wish to purchase. 

• If the cost of the home is $500,000 or under the minimum down payment is 5%. 
• If the cost of the home is between $500,000 to $999,999 then the minimum down payment is 5% of the first $500,000 and then 10% on the remainder. 
• If the cost of the home is over $1,000,000, then the minimum down payment is 20% of the purchase price. 

 It is in your best interest to put down a large lump sum as your down payment. Having a down payment of 20% can make it easier to be approved for a mortgage and help you avoid mortgage default insurance. However, not everyone can afford that 20%, so you will have what is referred to as a high-ratio mortgage. 

What is a high-ratio mortgage? 

So, what is a high-ratio mortgage and how does it work? A high-ratio mortgage is when you get a mortgage loan with a down payment of less than 20% of the home’s purchase price. As indicated above, depending on the price of the home, it is possible to qualify with a down payment of only 5%.  

A high-ratio mortgage isn’t necessarily a bad thing. However, lenders will see you as higher risk, so it does come with more stipulations than a conventional or low ratio mortgage, where you would have a down payment of at least 20% of the purchase price. 

To be able to qualify for a low ratio mortgage, you must follow these rules:

• The home you wish to purchase must be under $1,000,000. As mentioned above, homes over this price require a minimum of 20% down payment.
• Your down payment must be self-funded. You can’t borrow the money. 
• The maximum amortization period for a high-ratio mortgage is 25 years. 

Another important thing to note is that individuals with high-ratio mortgages will need mortgage default insurance.  

What is mortgage default insurance? 

Mortgage default insurance, also called mortgage loan insurance, is a fallback to protect the lender in case the borrower doesn’t make mortgage payments. If you have a high-ratio mortgage, you must get mortgage default insurance.  

Mortgage default insurance is provided by three Canadian institutions: The Canada Mortgage and Housing Corporation (CMHC), which is the largest provider. There’s also Genworth and Canada Guaranty, both of which are private insurers. CMHC is the most popular institution, and as such you might see mortgage default insurance referred to as CMHC insurance. 

How much your mortgage insurance premium will be depends on the size of your down payment. The more you can put down, the lower your rates will be. For example, the CMHC charges the following rates: 

• 4% of the mortgage or down payments between 5% – 9.99%
• 3.10% of the mortgage amount on down payments between 10% – 9.99%
• 2.80% of the mortgage amount on down payments between 15% – 19.99%

 Mortgage default insurance can be paid as a lump sum, but in most cases, it is built into your regular monthly mortgage payments. Check out this article to learn more about mortgage insurance in Canada. 

Pros and cons of a high-ratio mortgage 

Those who end up with a high-ratio mortgage usually don’t have a choice in the matter. But for individuals saving up to buy a home, you should be aware of how it works and the differences. Here are the pros and cons of a high-ratio mortgage when compared to a conventional or low-ratio mortgage. 

Pros

• Lower interest rates – this might surprise you but typically high-ratio mortgages come with lower interest rates. Why? Because the lenders have the protection of the insurance coverage to fall back on in the worst-case scenario, so you are a safer bet. As such, the mortgage lenders are willing to offer lower rates in an effort to get your business.
• You can afford a home faster – As houses increase in price, the fees for required down payments increase too. It can take a long time to save 20% of the price of a home these days so the option to only pay 5% down payment means you can afford to become a homeowner sooner.  

Cons

• You do need mortgage default insurance – Again, this is a requirement for all high-ratio mortgages, which means you are paying extra on top of what you already owe for the mortgage on your home.
• The amortization period is capped at 25 years – For conventional mortgages, you can take up to 35 years. Longer amortization periods mean smaller monthly payments, however, it always means you end up paying more in interest in the long run.
• High ratio mortgages cost more in the long run – With a high ratio mortgage, you need to borrow more money which means you’ll end up paying a higher amount back in interest over time than you would if you had a larger down payment.

Alternatives to a high-ratio mortgage 

There is nothing wrong with getting a high-ratio mortgage. As the cost of buying a home increases, they are becoming more and more popular among Canadians looking to own a home. However, it is important to be aware of the pros and cons. If you are unsure of whether a high-ratio mortgage is right for you, there are a couple of alternative options that you can consider to give you more equity in your home or help with affordability.  

• Use the Home Buyers’ Plan. For individuals who are buying their home, there is a program called the Home Buyers’ plan which allows you to withdraw up to $35,000 from your RRSP to be used as a down payment for your home. If you are buying the home as a couple, you can both withdraw from your RRSP allowing you a total of $70,000.
• Save more: If you don’t want a high-ratio mortgage then you’ll have to save longer until you have at least 20% of the total cost of the home to use as a down payment. You can advantage of your TFSA and/or high interest savings accounts to help you reach your goal.
• Look for a cheaper home: A final option is to reassess what you are looking for and find a cheaper home. If you can’t reach the 20% threshold then consider looking for a less expensive home. This way, your down payment will cover more of the cost and you can potentially reach that 20% goal. 

Whether you end up with a conventional or high-ratio mortgage make sure to shop around for mortgage quotes either yourself or with the assistance of a mortgage broker to ensure you get the best possible rates, no matter the size of your down payment.