A high ratio mortgage is when the borrower has a down payment of less than 20% of the property’s total price. This is also known as a loan to value (LTV) of more than 80%.
For a home priced $500,000 or less, a down payment of 5% should be made, and this goes up to 10% on any amount over $500,000 and up to $1 million. A property value of over a million requires a down payment of at least 20%.
A conventional or a low ratio mortgage is where the borrower has a down payment of more than 20%.
Whether you are new to Canada or have just graduated, the advantage of a high ratio mortgage is that it allows one to purchase a home with a down payment of as low as 5%. This is often beneficial for first-time homebuyers as they can purchase a home with a low down payment.
Also, the best-advertised interest rates generally fall into the category of high ratio mortgages.
However, high ratio mortgages are riskier for the bank as the property has less immediate equity, meaning that in the case of default, it may be challenging to recover the loss. As a result, insurance is a requirement to ensure that if a default occurs where the borrower can no longer make payments, the lender’s financial interests are protected.
What is Mortgage Default Insurance?
The primary insurance providers are Canada Mortgage and Housing Corporation (CMHC), including Genworth Financial and Canada Guaranty.
Substituting a higher down payment with a mortgage default insurance allows participating in the housing market a little easier for buyers.
An insurance application must be approved as a condition before the lender can provide financing. The coverage for the insurance comes from the overall monthly payment of the mortgage amortization period.
Do I qualify for a high ratio mortgage?
To qualify for a high ratio mortgage, the borrower must have a high income because the mortgage is amortized for 25 years. A good to excellent credit is needed to qualify as well.
Contact us today to learn more about High-Ratio Mortgages.
Jaspreet Dhugga – Mortgage Broker