What Is a High Ratio Mortgage?
A high ratio mortgage means that your down payment is less than 20%, so your mortgage amount is over 80% of the home’s value.
These mortgages are common in Canada, especially among first-time homebuyers looking to enter the real estate market. With a high ratio mortgage, you can buy a home with a smaller down payment, but this loan type comes with its own set of rules and insurance requirements.
For those considering this option, it's crucial to weigh its advantages and drawbacks.
Key Takeaways
High ratio mortgages have a down payment of less than 20%.
Default mortgage insurance is mandatory for high ratio mortgages.
It's important to evaluate the pros and cons of a high ratio mortgage.
Definition of a High Ratio Mortgage
A high ratio mortgage is when the down payment is less than 20% of the home's purchase price. This creates a higher loan-to-value ratio, meaning the loan is more significant concerning the home's total cost. You must pay mortgage insurance for these loans to protect lenders against the higher risk of non-payment.
High ratio mortgages enable buyers with limited savings to enter the housing market. Given the cost of real estate, especially in urban areas, this can make homeownership more accessible and realistic.
Who Can Get a High Ratio Mortgage?
It is often reported that only a first-time home buyer can obtain a high ratio mortgage. This is incorrect.
Anyone purchasing a home that they or one of their family members will occupy is eligible to purchase with less than 20% down payment. There is no maximum number of times that a home buyer can qualify for a default-insured mortgage.
What is the Minimum Down Payment Required
Even if they are shopping with less than 20% down payment for their home, Canadians are required to meet minimum down payment standards. Currently, Canadians are required to provide 5% of the first $500,000 and then 10% of the remaining value of the home, (up to $1M), as a minimum down payment.
For example, if a buyer was purchasing a home for $750,000 they would be required to come up with 5% of the first $500,000 ($25,000) and 10% of the remaining $250,000 (another $25,000), for a total of $50,000 as the minimum down payment.
Effective December 15th, 2024, Canadians will be able to obtain high ratio mortgages on purchases up to $1.50M. More details will be released in the coming months.
Regulations
In Canada, specific laws and regulations govern high ratio mortgages. Three different default mortgage insurance companies in Canada offer insurance to lenders for high ratio mortgages, CMHC or Canada Mortgage and Housing Corporation, Sagan and Canada Guaranty.
These companies allow lenders to mitigate their financial risk on these mortgage files. Your eligibility for a default-insured mortgage might depend on your credit score, income, and the price of the home in question.
The rules for high ratio mortgages are designed to protect both buyers and lenders. You must adhere to specified guidelines, including minimum credit requirements and financial assessments. Lenders are required to offer these mortgages only to qualified buyers who meet the criteria set forth by regulatory bodies.
Pros
Taking on a high ratio mortgage can be quite beneficial. You can buy a house even if you have saved less than 20% for a down payment. For many, especially first-time buyers, this is a crucial advantage. It allows you to enter the property market sooner, possibly before prices rise further.
High ratio mortgages enable you to preserve some savings for other needs. You don't need to deplete all your resources when making your initial purchase. It may also mean that you can afford a home that you initially thought was out of reach because of the lower upfront costs.
Typically, the rates for high ratio mortgages are about 0.20% to 0.60% lower. This is because the buyer pays the default insurance premium that protects the lender in case of default. Lenders love this business because the clients are the ones paying to mitigate their risks, as such they offer preferred pricing for these loans.
Cons
While high ratio mortgages provide an opportunity for home ownership with less initial saving, they involve some challenges. You are required to take out mortgage insurance, which increases your monthly costs. This insurance protects the lender, not you, in case you default on the loan.
The mortgage amount is higher compared to the home’s value, which could result in larger monthly payments. This may strain your financial situation, especially if your income is uncertain. Additionally, your repayment timeline might be stretched, and you may face stricter lending terms due to the higher risk involved.
2024 Changes to High Ratio Mortgages
Effective August 15th, 2024, first-time home buyers purchasing a new build qualify for 30-year amortization on their default-insured mortgage loans. This helps to lower monthly payments and take some stress off of cash flow for that specific property type.
Effective December 15th, 2024, all high ratio purchasers of new builds will have access to 30-year amortization and all high ratio, first-time home buyers (for all property types) will have access to 30-year amortization for purchases. These changes will help mitigate the higher payments from the added premiums and lower down payments.
Mortgage Insurance Requirements
Mortgage Default Insurance
If your down payment is less than 20% of the home's purchase price, lenders require mortgage default insurance. This insurance protects the lender if you cannot keep up with your mortgage payments. It is essential for mortgages with high loan-to-value ratios.
Mortgage default insurance is usually provided by institutions like the Canada Mortgage and Housing Corporation (CMHC). This insurance generally applies to homes priced under $1 million and must be owner-occupied. Having this insurance allows you to qualify for a mortgage even with a lower down payment.
Calculating Insurance Premiums
At 5% down payment, the default mortgage insurance premiums are 4%. As a buyer can increase their down payment towards the 20% mark, the premiums decrease. At 10% down payment the premium decreases to 3.10% and at 15% down payment the premium decreases to 2.80%.
Conventional vs. High Ratio Mortgages
A conventional mortgage requires a down payment of at least 20% of the home's purchase price. This type of mortgage doesn't require mortgage insurance, saving you extra costs. Without insurance fees, and with a higher down payment, your monthly payments may be lower over time.
In contrast, a high ratio mortgage involves a down payment of less than 20%. Because of the smaller initial payment, mortgage default insurance is mandatory in Canada for high ratio mortgages. This insurance, offered by CMHC, Sagen, or Canada Guaranty, protects lenders if you're unable to meet payments.
Choosing between these depends largely on your financial situation. If you have substantial savings, a conventional mortgage can offer long-term savings due to the lack of insurance costs. However, a high ratio mortgage can make homeownership accessible sooner, especially if you don't have the full 20% down payment available.
Is a High Ratio Mortgage Right for You?
While high ratio mortgages do come with the added cost of mortgage insurance, they can make sense in certain situations. For example, a high ratio mortgage might allow you to own a home sooner, which also allows you to accumulate equity for longer. So if your home increases in value, and homes in your area are increasing in price, the added cost of a high ratio mortgage can be worth it.
For the best advice for your situation, get in touch with a mortgage broker. The mortgage brokers at Spire Mortgage are mortgage experts, so they can fully explain your options and help you understand the ins and outs of a high ratio mortgage.
