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Definition of a High Ratio Mortgage
A high ratio mortgage is a mortgage in which a borrower places a down payment of less than 20% of the purchase price on a home.
Another way of phrasing a high ratio mortgage is one with a loan to value ratio of more than 80%. A mortgage with more than a 20% down payment is called a conventional mortgage.
A high ratio mortgage will require mortgage insurance. Mortgage insurance is usually purchased by the lender through one of Canada’s three default insurers:
The cost of the premium is added on to the mortgage and amortized over the length of the mortgage. It can also be added to the closing costs. however this is not the norm.
Mr. McGillicuddy desires to purchase a home with a purchase price of $250,000. He has $30,000, available in cash for a down payment. Since the amount of the down payment is less than 20%, the mortgage is classified as a high ratio mortgage and Mr. McGillicuddy will be required to purchase mortgage insurance.
A High Ratio Mortgage allows Canadians to purchase a house with
as little as 5% down.
High ratio mortgages are considered riskier for banks, because there is less immediate equity in the property, and in the event of default, it may be more difficult to recoup the loss in total. Therefore, the federal requirement of mortgage insurance became law.
Because of mortgage insurance, a high ratio mortgage can still be obtained with a down payment as little as 5% of the purchase price. The ability to use mortgage insurance as a replacement for a higher down payment opens the housing market to a great many people.
For instance, in the example above, a down payment of $50,000 would be required to qualify for a conventional mortgage on a $250,000 home. With a high ratio mortgage and the purchase of mortgage insurance, the down payment can be as little as $12,500. Not only does this open the housing market to many, it also allows a potential buyer to purchase a better quality home, provided the buyer qualifies for a mortgage otherwise.
At First Foundation, our lenders provide both conventional and high ratio mortgage options. Contact our Mortgage Brokers to discuss which option suits your particular situation best.